Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
16th Edition
ISBN: 9780134642468
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 11, Problem 11.49P
Dropping a customer, activity-based costing, ethics. Justin Anders is the
| Sales | $43,680 |
| Cost of goods sold (all variable) | 26,180 |
| Order processing (50 orders processed at $280 per order) | 14,000 |
| Delivery (5,000 miles driven at $0.70 per mile) | 3,500 |
| Rush orders (6 rush orders at $154 per rush order) | 924 |
| Customer sales visits (6 sales calls at $140 per call) | 840 |
| Total costs | 45,444 |
| Profits | $(1,764) |
Sara looks at the report and remarks, “I’m glad to see all my hard work is paying off with Donnelly’s. Sales have gone up 10% over the previous quarter!”
Justin replies, ‘Increased sales are great, but I’m worried about Donnelly’s margin, Sara. We were showing a profit with Donnelly’s at the lower sales level, but now we’re showing a loss. Gross margin percentage this quarter was 40%, down five percentage points from the prior quarter I’m afraid that corporate will push hard to drop them as a customer if things don’t turn around.”
“That’s crazy,” Sara responds. “A lot of that overhead for things like order processing, deliveries, and sales calls would just be allocated to other customers if we dropped Donnelly’s. This report makes it look like we’re losing money on Donnelly’s when we’re not. In any case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Donnelly’s is a very good customer.”
- 1. Assume that Sara is partly correct in her assessment of the report. Upon further investigation, it is determined that 10% of the order
processing costs and 20% of the delivery costs would not be avoidable if CRS were to drop Donnelly’s. Would CRS benefit from dropping Donnelly’s? Show your calculations. - 2. Sara’s bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Sara have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this?
- 3. Should Justin rework the numbers? How should he respond to Sara’s comments about making Donnelly’s look more profitable?
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Dropping a customer, activity-based costing, ethics. Justin Anders is the management accountant for Carey Restaurant Supply (CRS). Sara Brinkley, the CRS sales manager, and Justin are meeting to discuss the profitability of one of the customers, Donnelly’s Pizza. Justin hands Sara the following analysis of Donnelly’s activity during the last quarter, taken from CRS’s activity-based costing system:
Sara looks at the report and remarks, “I’m glad to see all my hard work is paying off with Donnelly’s. Sales have gone up 10% over the previous quarter!”
Justin replies, “Increased sales are great, but I’m worried about Donnelly’s margin, Sara. We were showing a profit with Donnelly’s at the lower sales level, but now we’re showing a loss. Gross margin percentage this quarter was 40%, down five percentage points from the prior quarter. I’m afraid that corporate will push hard to drop them as a customer if things don’t turn around.”
“That’s crazy,” Sara responds. “A lot of that overhead for…
The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold. However, Barry Love, the firm’s new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost information relating to two of Chocolate Baker’s major products.
Muffins
Cheesecake
Revenue
$53,000
$46,000
Cost of goods sold
26,000
21,000
Delivery activity:
Number of deliveries
150
85
Average length of delivery
10 minutes
15 minutes
Cost per hour for delivery
$20.00
$20.00
Using activity-based costing, which one of the following statements is correct?
A. The cheesecakes are $75 more profitable.
B. The muffins have a higher profitability as a percentage of sales and therefore are more advantageous.
C. The muffins are $2,000 more…
John Stern operates a retail store. The business is studying order processing costs behavior and has gathered the following data for a recent seven-month period.
Month
Sales Order
Order Processing Costs
June
3,000
$40,000
July
1,500
$28,000
August
4,000
$65,000
September
2,800
$39,000
October
2,300
$32,000
November
1,000
$20,000
December
2,000
$30,000
Requirements:
a). In view of Stern’s cost behavior pattern, which of the two methods appear more appropriate? Explain your answer.
Chapter 11 Solutions
Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
Ch. 11 - Prob. 11.1QCh. 11 - Define relevant costs. Why are historical costs...Ch. 11 - All future costs are relevant. Do you agree? Why?Ch. 11 - Distinguish between quantitative and qualitative...Ch. 11 - Describe two potential problems that should be...Ch. 11 - Variable costs are always relevant, and fixed...Ch. 11 - A component part should be purchased whenever the...Ch. 11 - Prob. 11.8QCh. 11 - Managers should always buy inventory in quantities...Ch. 11 - Management should always maximize sales of the...
Ch. 11 - Prob. 11.11QCh. 11 - Cost written off as depreciation on equipment...Ch. 11 - Managers will always choose the alternative that...Ch. 11 - Prob. 11.14QCh. 11 - Prob. 11.15QCh. 11 - Qualitative and quantitative factors. Which of the...Ch. 11 - Special order, opportunity cost. Chade Corp. is...Ch. 11 - Prob. 11.18MCQCh. 11 - Keep or drop a business segment. Lees Corp. is...Ch. 11 - Relevant costs. Ace Cleaning Service is...Ch. 11 - Disposal of assets. Answer the following...Ch. 11 - Relevant and irrelevant costs. Answer the...Ch. 11 - Multiple choice. (CPA) Choose the best answer. 1....Ch. 11 - Special order, activity-based costing. (CMA,...Ch. 11 - Make versus buy, activity-based costing. The...Ch. 11 - Inventory decision, opportunity costs. Best Trim,...Ch. 11 - Relevant costs, contribution margin, product...Ch. 11 - Selection of most profitable product. Body Image,...Ch. 11 - Theory of constraints, throughput margin, relevant...Ch. 11 - Closing and opening stores. Sanchez Corporation...Ch. 11 - Prob. 11.31ECh. 11 - Relevance of equipment costs. Janets Bakery is...Ch. 11 - Equipment upgrade versus replacement. (A. Spero,...Ch. 11 - Special order, short-run pricing. Diamond...Ch. 11 - Short-run pricing, capacity constraints. Fashion...Ch. 11 - International outsourcing. Riverside Clippers Corp...Ch. 11 - Relevant costs, opportunity costs. Gavin Martin,...Ch. 11 - Opportunity costs and relevant costs. Jason Wu...Ch. 11 - Opportunity costs. (H. Schaefer, adapted) The Wild...Ch. 11 - Make or buy, unknown level of volume. (A....Ch. 11 - Make versus buy, activity-based costing,...Ch. 11 - Prob. 11.42PCh. 11 - Product mix, special order. (N. Melumad, adapted)...Ch. 11 - Theory of constraints, throughput margin, and...Ch. 11 - Theory of constraints, contribution margin,...Ch. 11 - Closing down divisions. Ainsley Corporation has...Ch. 11 - Dropping a product line, selling more tours....Ch. 11 - Prob. 11.48PCh. 11 - Dropping a customer, activity-based costing,...Ch. 11 - Equipment replacement decisions and performance...
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