Product Line Profitability Analysis 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 they discontinue the Other Flooring Products line. The operating results from the most recent period are:
|
Sales
|
Paint & Paint Supplies
$285,000
|
Carpet
$235,000
|
Other Flooring Products
$175,550
|
|
Cost of goods sold
|
165,000
|
150,000
|
135,250
|
SPF estimates that store support expenses are approximately 28.5 percent of revenues. Harish Rana, SPF's controller, states that 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:
|
Activity (cost driver) Other Flooring Products
|
Paint & Paint
|
Supplies
|
Carpet
|
|
Order processing (number of purchase orders)
|
110
|
200
|
25
|
|
Receiving (number of deliveries)
|
40
|
120
|
10
|
|
Inventory management (number of hours per delivery)
|
10
|
40
|
6
|
|
Customer support (hours required per sale)
|
0.5
|
8.5
|
0.25
|
Harish estimates activity-cost rates for each activity as follows:
Order processing $135 per purchase order
Receiving 180 per delivery
Inventory management 30 per hour
Customer support 15 per hour
Required-
1. Prepare a product-line profitability report for SPF under the current costing system.
2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.
3. What new insights does the ABC system in requirement 2 provide to SPF managers?