[kcf]

Boston Depot sells office supplies to area corporations and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a "commodity" business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root cause of declining profits, he decided to analyze the profitability of two of the firm's major customers: Omega International (OI) and City of Albion (CA).

According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated here:

Customer Profitability Analysis
Omega International City of Albion
Sales $69,380 $74,290
Product cost -$32,960 -$45,350
Service fees (15.6% of sales) -$10,823 -$11,589
Gross margin $25,597 $17,351
Gross margin percent 36.9% 23.4%

Boston Depot adds a flat 15.6 percent to all sales for expenses incurred in such activities as handling customers' requests, pick-packing, order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operation Manager, Jamie Steel, points out that CA has been a much heavier service user than OI. She shows the following data to suport her belief

Distribution Services Activities for OI and CA

OI CA
Number of requisitions 270 720

Requisition line (all pick-packing) 860 1,960
Average number of cartons in warehouse 43 460
Number of miles per delivery 4.8 5.4
Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:
Total Estimated Estimated Annual Activity

Annual Expense Cost Driver Activity Level
Requisitions handling $2,837,790 Requisitions 272,170 Warehouse $897,350 Number of cartons 64,300
Pick-packing $831,250 Pick-pack lines 625,960
Data entry $534,150
Delivery charge $9.30 per requisition (delivery) plus $0.30 per mile
Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the same.


Using activity-based costing, compute the profitablity of City of Albion.
A) $2,984.47
B) $2,855.56
C) $3,105.99
D) $2,875.56
E) $3,222.27
I have tried everything: divide the annual expense from annual activity and x CA numbers on top and adding the miles for trip.. can not come up with the correct ans. Please help

[morgaine300]

The information presented is a bit on the confusing side. But I'll just yank some numbers out and show what they're getting at.

The requisition costs are $2,837,790. What you're basically doing is pro-rating those costs over the total requisitions. Normally you'd add the 270 and 790 to get total requisitions, but there's 272,170 total requisitions. (That means either there's more divisions than these using requisitions, or something.)

So you figure out what that is per each requisition: 2,837,790/272,170 total requisitions = $10.43 (nice number with lots of decimals). Now you have a rate per requisition.

You take this rate and apply it to the number each... what are these? Oh, customers, OK. (Helps if I actually read it.) So one customer has 270 requisitions, at $10.43 each, and the other has 720, again, at $10.43. So then you have the amount of requisition costs for each customer.

You do a similar sort of thing for each of the costs. It looks like some things involve more than one thing, so that takes reading very carefully and following every step. Just do one thing at a time and don't let the rest confuse you. Write it down in some neat fashion and LABEL IT. (I never can stress labeling and neatness enough!) Go through each one in this sort of manner.

It doesn't have to be complicated. Being longer and nasty looking doesn't make it harder, if you just take one step at a time. Pretend it's lots of different problems instead of one long one. I'm not quite sure of it because the info is a little confusing the way it came out posted.

It would help if you'd show your work instead of just saying you're getting wrong answers. (Haven't I told you this before?) If we saw your work, we could more easily find where you might be going wrong. It could be something simple... or not. Can't know without knowing what you did.

[kcf]

Customer profitablity analysis
OI
Sales 69,380
product cost 32,960
serivce fee -32,660
gross margin 25,597
Gross margin profit 36.9%

City of Aibon (CA)
Sales 74,350
product cost -45,350
serivce fee -11,589
gross margin 17,351
Gross margin profit 23.4

distribution of activities
oi
# of requistions 279
pick packing 860
aver numer of cartions in warehouse 43
number of delivery miles 4.8

CA
# of requistions 720
pick packing 1,960
aver numer of cartions in warehouse 460
number of delivery miles 5.4


distribution service for oi and ca
total estimated
annual expences
req handing 2,837,790
warehouse 897,350
pick pack 831,250
date enty 534,150
deliver charge 9.30 per requistions plus .30 per mile


estimated annual activity level
requistions 272,170
#of cartons 64,300
pick-pack 625,960


Using activity-based costing, compute the profitablity of City of CA

req 283,700/272,170x720=7509.60
all pack
831,20/6259.60x1960=2,602.80
cartons
8,973.50/64,300x461=1991.96
dilivery
9.30x720=6,696
miles
.30(5.4x720)=1,166.40
now for the profit add costs
7,509.60+2602.80+1991.96=12104.36
less profit
6696+1166.40=7862.40
not sure if you do anything with data entry
according to this the profit is 7,862.40
the only profit I see is in the money they charge per delivery.. Help

[morgaine300]

The info is still a bit on the confusing side, but I'll tell you what I can. The numbers are easier to pull out of the second post, but I'm having to jump back and forth between these long posts to get info out of the first post. In all that scrolling back and forth, I could very easily be missing something important.

req 283,700/272,170x720=7509.60

That's OK.

all pack
831,20/6259.60x1960=2,602.80

I have a different answer, but it's close so I'm assuming you rounded differently. You might have to play around with the rounding. Some of their answers are close, so you need to be within just a few dollars to know you're correct.

You are, however, being inconsisten. Your first answer of 7509.60 agrees with mine to the penny. Meaning the cost per requisition you rounded to $10.43 like I did. But the second one you didn't round the cost per pick pack at all. At least be consistent about it.

cartons
8,973.50/64,300x461=1991.96

I have no idea where you're getting that from, but it might help if you stopped dropping zeros and moving decimals around. You're doing the correct thing, but the final answer isn't right, so I don't know what's happening with the math in between.

dilivery
9.30x720=6,696
miles
.30(5.4x720)=1,166.40

That's all correct.

now for the profit add costs
7,509.60+2602.80+1991.96=12104.36
less profit
6696+1166.40=7862.40
not sure if you do anything with data entry
according to this the profit is 7,862.40
the only profit I see is in the money they charge per delivery.. Help

I'm not following your line of thinking here. How is delivery charges profit? That's part of their costs! Look at the original info given: sales, product costs, service fee... I'm having to assume that "product costs" means the actual cost of the supplies they're selling. They used to consider service costs as a percent of sales, but are re-doing that as ABC costing. So your job is re-figuring their actual costs rather than using just a percent of sales. And delivery is just one of those costs. Profit is revenues less costs. How would delivery be reveues less costs? Profit isn't a particular "thing" - it's just what you're charging above and beyond your costs.

Although if you ask me, something is goofy in the problem anyway. I don't know either what you're supposed to do with the data entry. They haven't given any activity base for it. A logical activity base might be the number of requisitions, but it gives you all the other ones, so I don't know why they'd expect you to make an assumption for just that one cost. (If it's based on requisitions, why not consider it part of "requisition handling"?) But they do include data entry in their original list of service fee costs.

Plus the original data given doesn't work out. Notice that sales less all the costs don't equal the gross margin they give. So the original numbers aren't even correct. So there's something terribly screwy about the information presented. (Unless you are leaving something out.)

I can't come up with any of their answers. I'm getting around $4500 which is bigger than all of them. If I could add some of that data entry cost, maybe that would bring it down to that vicinity, but not enough info to do that.

[morgaine300]

Well, just for fun, I did the data entry using requisitions as the activity base. That definitely puts it in the vicinity of their choices, but far enough off that I couldn't pick any particular one of them. (I'm ending up between C & E.)

[morgaine300]

Plus the original data given doesn't work out. Notice that sales less all the costs don't equal the gross margin they give. So the original numbers aren't even correct. So there's something terribly screwy about the information presented. (Unless you are leaving something out.)

Well, I figured out the problem here anyway. When you re-copied it into the second post, you changed some of the numbers. In fact, you changed OI's quite drastically.

Given that you've copied that part incorrectly into the second post, I feel I can't rely on any of the information you've given. However, I have already spent a great deal of time on this one problem and it's difficult scrolling back and forth between the two posts. So I'm not going to go back and try to check the accuracy of everything in your second post.

You need to make sure the information you give is accurate or no one can help you or tell you what is wrong.