Question

Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if it discontinues the Other Flooring Products line. The operating results from the most recent period are:

	Paint & Paint Supplies		Carpet		Other Flooring Products
Sales	$246,300		$268,000		$170,000
Cost of goods sold	118,000		174,000		134,000

SPF estimates that store support expenses are approximately 28% of revenues.

Harish Rana, SPF’s controller, states that while every sale has one purchase order, not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows:

	Paint & Paint				Other Flooring
Activity (cost driver)	Supplies		Carpet		Products
Order processing (number of purchase orders)	348		197		107
Receiving (number of deliveries)	51		155		70
Customer support (hours required per sale)	0.40		7.0		0.60

Harish estimates activity-cost rates for each activity as follows:

Order processing		$157 per purchase order
Receiving		180 per delivery
Customer support		25 per hour

Required:
1.	Prepare a product-line profitability report for SPF under the current costing system. (Loss amounts should be indicated by a minus sign. Round operating margin (loss) to 2 decimal places (i.e. .2134 should be entered as 21.34%).) PLEASE EXPLAIN HOW YOU GOT THE ANSWER!!!!

			Paint & Paint supplies			Carpet	other flooring products
sales
COGS
gross margin			$0			$0	$0
store support
operating income (loss)
operating margin (loss)			%			%	%

2.

Prepare a product-line profitability report for SPF using the ABC information the controller provides.(Loss amounts should be indicated by a minus sign. Round operating margin (loss) to 2 decimal places (i.e. .2134 should be entered as 21.34%).) FILL IN THE MISSING ACTIVITIES UNDER STORE SUPPORT. PLEASE EXPLAIN HOW YOU GOT THE ANSWER!!!!

			Paint & Paint supplies			Carpet	other flooring products
sales
COGS
gross margin			$0			$0	$0
store support
total store support			0			0	0
operating income (loss)
operating margin (loss)			%			%	%

Answer 1

Solution 1:

Product Line Profitability Report - Current Costing System
Particulars	Paint and Paint Supplies	Carpet	Other Flooring Products
Sales	$246,300.00	$268,000.00	$170,000.00
Cost of Goods Sold	$118,000.00	$174,000.00	$134,000.00
Gross Margin	$128,300.00	$94,000.00	$36,000.00
Store Support (28% of Sales)	$68,964.00	$75,040.00	$47,600.00
Operating Income (Loss)	$59,336.00	$18,960.00	-$11,600.00
Operating Margin (Loss)	24.09%	7.07%	-6.82%

Solution 2:

Product Line Profitability Report - ABC Costing System
Particulars	Paint and Paint Supplies	Carpet	Other Flooring Products
Sales	$246,300.00	$268,000.00	$170,000.00
Cost of Goods Sold	$118,000.00	$174,000.00	$134,000.00
Gross Margin	$128,300.00	$94,000.00	$36,000.00
Store Support:
Order Processing Paint & Paint Supplies - 348*157 Carpet - 197*157 Other Flooring Products - 107*157	$54,636.00	$30,929.00	$16,799.00
Receiving Paint & Paint Supplies - 51*180 Carpet - 155*180 Other Flooring Products - 70*180	$9,180.00	$27,900.00	$12,600.00
Customer Support Paint & Paint Supplies - 348*0.4*25 Carpet - 197*7*25 Other Flooring Products - 107*0.6*25	$3,480.00	$34,475.00	$1,605.00
Operating Income (Loss)	$61,004.00	$696.00	$4,996.00
Operating Margin (Loss)	24.77%	0.26%	2.94%