Activity Based Costing
The New Millenium Linen Company is a small family company that produces and sells towels. Millenium sells the towels to three types of stores: department stores, mid-sized specialty stores and small gift shops. The company is doing well and the CEO wants to expand the business. The contribution margin ratio is the highest for the small gift shops, so the CEO feels that those are the type of retail outlets to pursue.
Below find Millenium's income statement for last year.
Millenium Linen Company
For the year ended 12-31-XX
Variable Production Costs -150,000
Contribution Margin =$350,000
Production Overhead $120,000
Sellling & Distribution Costs 180,000 -300,000
Net Operating Income = $50,000
Customer support and distribution costs are pretty high at Millenium. The total amount was $180,000 last year. The marketing manager has recently been to a seminar and learned about applying ABC to analyze customer and distribution costs. He suggests that the company analyze overhead costs associated with supporting different types of customers before proceeding with an expansion. The marketing manager knows that the small shops require a lot of attention and is somewhat dubious about the CEO's proposed strategy. The CEO accepts the suggestion and you are brought in as a consultant to prepare the analysis. The table below provides some information that may be pertinent for the analysis.
Description /Customer Support &/Department Stores/Specialty Shops/Gift Shops
Distribution Costs Activity Level Activity Level Activity Level
Sales (units) 10,000 5,000 5,000
Revenues $150,000 $100,000 $250,000
Contribution 50% 75% 80%
No of customers 5 45 250
Total costs/No ($40,000) 10 90 900
of orders places
of sales calls (80,000) 5 195 800
Total costs/No (60,000) 20 480 1,000
1. Calculate the customer support and distribution costs associated with the three types of customers.
- Use a simple strategy first and allocate the costs based on revenues.
- Recalculate the allocations using activity based costing (ABC).
2. Determine contribution margin less customer support and distribution costs for both approaches above.
3. Which type of customer should the company support and why? Refer to your analysis in your response.© BrainMass Inc. brainmass.com June 4, 2020, 12:22 am ad1c9bdddf
The solution explains cost allocation using traditional simple strategy and then using activity based costing. It includes calculation as well as explanation to help the student understand the problem.