Question 1: Service Costing & ABC Part A African Adventure Ltd offers a series of holiday packages aimed at families, seniors, and corporate groups. The financial controller is preparing for the annual board meeting and is concerned about the loss the business sustained in the past year. He has examined the profits for each of the three departments of the business and it seems that the corporate department is the source of the problem. The financial controller looked at the three packages offered by the corporate department to establish which are profitable or not profitable. The sales and direct cost of each package for the last year are as follows: South Africa Egypt Namibia Number of packages sold 10 20 10 Number of people per package 5 6 8 Revenue per person $18,000 $12,000 $14,000 Direct cost per package: Tour leader $5,000 $12,000 $9,000 Tour assistant $2,000 $3,000 $6,000 Air travel $28,000 $30,000 $32,00 Accommodation $15,000 $26,000 $24,000 Equipment hires $4,000 0 $9,000 Meals $18,000 $15,000 $8,000 To calculate the profitability of each package, a proportion of the overhead costs of running the corporate department needs to be allocated to the three packages in proportion to actual sales revenue. For the last year these overhead costs were as follows: $ Salaries 200,000 Phone 2,000 Depreciation on Equipment 5,000 Utilities 2,000 Rent 9,000 Other department costs 12,000 Total 230,000 Required: (i) Calculate the profit per package and the total profitability of each of the three corporate packages. (ii) Compare the profitability of the three corporate packages. (iii) Do you consider that the allocation of the corporate department overhead using actual sales revenue as appropriate? Can you suggest a better method?
Question 1: Service Costing & ABC
Part A
African Adventure Ltd offers a series of holiday packages aimed at families, seniors, and
corporate groups. The financial controller is preparing for the annual board meeting and is
concerned about the loss the business sustained in the past year. He has examined the profits
for each of the three departments of the business and it seems that the corporate department is
the source of the problem.
The financial controller looked at the three packages offered by the corporate department to
establish which are profitable or not profitable. The sales and direct cost of each package for the
last year are as follows:
South Africa Egypt Namibia
Number of packages sold 10 20 10
Number of people per package 5 6 8
Revenue per person $18,000 $12,000 $14,000
Direct cost per package:
Tour leader $5,000 $12,000 $9,000
Tour assistant $2,000 $3,000 $6,000
Air travel $28,000 $30,000 $32,00
Accommodation $15,000 $26,000 $24,000
Equipment hires $4,000 0 $9,000
Meals $18,000 $15,000 $8,000
To calculate the profitability of each package, a proportion of the
corporate department needs to be allocated to the three packages in proportion to actual sales
revenue. For the last year these overhead costs were as follows:
$
Salaries 200,000
Phone 2,000
Utilities 2,000
Rent 9,000
Other department costs 12,000
Total 230,000
Required:
(i) Calculate the profit per package and the total profitability of each of the three corporate
packages.
(ii) Compare the profitability of the three corporate packages.
(iii) Do you consider that the allocation of the corporate department overhead using actual
sales revenue as appropriate? Can you suggest a better method?
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