Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 29

Product-Line Profitability; ABC Supermart Food Stores (SFS) has experienced net operating losses in its frozen food products line in the last few periods. Management believes that the store can improve its profitability if SFS discontinues frozen foods. The operating results from the most recent period are:

SFS estimates that store support expenses, in total, are approximately 20% of revenues.
The controller says that not every sales dollar requires or uses the same amount of store support activities. A preliminary analysis reveals store support activities for these three product lines are:

The controller estimates activity-cost rates for each activity as follows:

Required
1. Prepare a product-line profitability report for SFS under the current costing system.
2. Prepare a product-line profitability report for SFS using the ABC information the controller provides.
3. What new insights does the ABC system in requirement 2 provide to SFS managers
4. It is not clear what measure of activity was used to determine the activity-cost rates above. Comment on the impact of using the expected driver consumption versus the practical capacity of the driver when computing the activity-cost rates.