Revenue Allocation Case Study

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If the costs are allocated by revenue, the results are as follows: Revenue Allocation Profit Dept 0.3 54000 21000 Specialty 0.2 36000 39000 Gift 0.5 90000 110000 This shows that gift shops are the most profitable customers. They have high margins, there are a lot of them, and they generate the most total profit as a result. Activity-based costing reveals that this analysis is faulty. Using activity based costing, we find out how much work goes into the sales for each category. The results are as follows: Department Stores Revenues 150000 Contribution 75000 Orders 400 0.01 Sales 300 0.005 Shipments 1066.666667 0.013333 Net Income 73233 Specialty Stores Revenues 100000 Contribution 75000 Orders 3600 0.09 Sales 11700 0.195 Shipments 25600 0.32 Net Income 34100 Gift Shops Revenues 250000 Contribution 200000 Orders 36000 0.9 Sales 48000 0.8 Shipments 53333.33333 0.666667 Net Income 62667 Gift shops are not the most profitable customer. The department stores are the most profitable customer group overall. They generate less income than gift shops do, and according to the initial non-ABC calculation are the least profitable customer group, but the reality is that it costs very little to service department stores. This is why the margins are low. Gift shops, on the other hand, are low-volume buyers. They require a lot of service relative to the amount of sales that an individual store generates. If we break down our

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