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Convenience Stores Create Software to Lift Profitability LEAD STORY-DATELINE: (Wall Street Journal) {web site} , February 15, 2001. The convenience-store industry has worked to create a software program to cut inventory costs and boost profitability. The tool helps retailers more correctly assess an item's profitability by using the operating, labor, inventory, and overhead costs for each item. Before using this software, the convenience store industry made stocking decisions predominately on each product's gross profit, the retail price minus the wholesale price.
Retailers did not consider the handling costs in decisions to stock a product. Handling costs are significant amounts for convenience stores. But, with heightened competition, distributors and retailers cannot afford to use outdated, limited financial measures to analyze costs.

The study and software was a joint effort of the (American Wholesale Marketers Association) and the (National Association of Convenience Stores). It was funded in part by major manufacturers such as (PepsiCo Inc).'s (Frito-Lay Inc.), (Hershey Foods Corp.),
(Anheuser-Busch Cos.), and Philip Morris Cos. Convenience stores are looking at more competition from supermarkets, drugstores, and membership warehouse clubs, which have added gas pumps and quicker checkouts. Therefore, cost cuts are needed to increase convenience stores' competitive edge.

Some retailers have found that it is cost effective to only stock one brand of a product. Others found that stocking particular products was costing the convenience store so much that they were incurring a loss on the sale of that particular product. The software takes all of these costs into consideration and shows where non-profitable products are losing money. The use of the software helps convenience stores increase sales and decrease costs.

List all of the types of costs that can be associated with a product.
Why does the convenience-store industry need to cut its costs?
How does this software tool help to more accurately assess an item's profitability?
How can the software help cut inventory costs?
Is useful information provided to decision-makers by knowing the specific carrying costs associated with a particular brand of product?
Zimmerman, Ann. "Convenience Stores Create Software to Lift Profitability", (Wall Street Journal,) 15 February 2001, p. B12.


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List all of the types of costs that can be associated with a product.

Apart from the price of the product paid to the supplier or vendor, some of the other costs associated with the product are:

1) Cost of storing the product/ Inventory holding costs (For example, rent of the space occupied in the warehouse or opportunity costs associated with holding the inventory)

2) Cost of maintainence, if any in keeping the product in the original condition, such as regular cleaning/dusting,etc, which requires labor.

3) Cost of security of the stored product.

4) Delivery costs, if any, after the product is being sold to the consumer.

5) Costs related to pilferage,etc. of products (such as those related to perishable products)

Why does the convenience-store industry need to cut its costs?

Convenience store industry need to cut its costs in order to face the stiff competition from Big Box retailers such as Walmart, Target etc. whose procurement prices are much less as compared to convenience stores, primarily due to the fact that their scale of operations are huge and they enjoy substantial economies of scale and thus, utilize their bargaining power to obtain products from vendors at much lower costs. Further, due to ther large scale operations, they have access to mutliple ...

Solution Summary

List all of the types of costs that can be associated with a product.

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BYP2-1 Managerial Accounting/ Job Costing

BYP2.1 Du Page Products Company uses a job order cost system. For a number of months
there has been an ongoing rift between the sales department and the production
department concerning a special.order product, TC.1. TC.1 is a seasonal product
that is manufactured in batches of 1,000 units. TC.1 is sold at cost plus a markup
of 40% of cost.
The sales department is unhappy because fluctuating unit production costs
significantly affect selling prices. Sales personnel complain that this has caused
excessive customer complaints and the loss of considerable orders for TC.1.
The production department maintains that each job order must be fully costed on
the basis of the costs incurred during the period in which the goods are produced.
Production personnel maintain that the only real solution to the problem is for the
sales department to increase sales in the slack periods.
Sandra Devona, president of the company, asks you as the company accountant
to collect quarterly data for the past year on TC.1. From the cost accounting system,
you accumulate the following production quantity and cost data.

Costs 1 2 3 4
Direct materials $100,000 $220,000 $80,000 $200,000
Direct labor 60,000 132,000 48,000 120,000
Manufacturing 105,000 123,000 97,000 125,000
Total 265,000 475,000 225,000 445,000 225,000

Production in 5 11 4 10

Unit cost (per $53,000 $43,182 $56,250 $44,500

With the class divided into groups, answer the following questions.
a. What manufacturing cost element is responsible for the fluctuating unit costs?
b. What is your recommended solution to the problem of fluctuating unit costs?
c. Restate the quarterly data on the basis of your recommended solution.

The problem is located in Chapter 2.

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