Love) ACC 403 MoD 4 Activity Based Costing
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 Milleniums 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
Selling & Distribution Costs 180,000 300,000
Net Operating Income $50,000
Customer support & 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 CEOs 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 & Distribution Costs Department Stores
Activity Level Specialty Shops
Activity Level Gift Shops
Sales (units) 10,000 5,000 5,000
Revenues $150,000 $100,000 $250,000
Contribution margin ratio 50% 75% 80%
No of customers 5 45 250
Total costs/No of orders places $40,000 10 90 900
Total costs/No of sales calls 80,000 5 195 800
Total costs/No of shipments 60,000 20 480 1,000
1. Calculate the customer support and distribution costs associated with the three types of customers.
o Use a simple strategy first and allocate the costs based on revenues.
o 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.
Modular Case Assignment Expectations:
The submission should be 2 to 4 pages and need to include computations in good format as well as a discussion interpreting the analysis. Answer all questions and include references in APA format.