PROBLEM11-1A ______
Figure Four Ltd, specialises in the distribution of pharmaceutical products. Figure Four buys from pharmaceutical companies and resells to each of three different markets:
a.General supermarket chains
b.Drugstore chains
c.Ma and Pa single-store pharmacies
Rick Flair, the new controller of Figure Four, reported the following data for August 2002:
GeneralMa and Pa
SupermarketDrugstoreSingle
ChainsChainsStores
Average revenue per delivery£30,900£10,500£1,980
Average cost of goods sold per delivery£30,000£10,000£1,800
Number of deliveries1203001,000
For many years, Figure Four has used gross margin percentage [(Revenue B Cost of goods sold) Revenue] to evaluate the relative profitability of its different groupings of customers (distribution outlets).
Flair recently attended a seminar on activity-based costing and decides to consider using it at Figure Four. Flair meets with all the key managers and many staff members. People generally agree that there are five key activity areas at Figure Four:
Activity AreaCost Driver
1. Customer purchase order processingPurchase orders by customers
2. Line-item orderingLine items per purchase order
3. Store deliveryStore deliveries
4. Cartons shipped to storesCartons shipped to a store per delivery
5. Shelf-stocking at customer storesHours of shelf-stocking
Each customer purchase order consists of one or more line items. A line item represents a single product (such as Extra-Strength Tylenol Tablets). Each store delivery entails delivery of one or more cartons of products to a customer. Each product is delivered in one or more separate cartons. Figure Four staff stack cartons directly onto display shelves in a store. Currently, there is no charge for this service, and not all customers use Figure Four for this activity.
PROBLEM 11-1A
Continued
The August 2002 operating costs (other than costs of goods sold) of Figure Four are £301,080. These operating costs are assigned to the five activity areas. The costs in each area and the quantity of the cost-allocation base used in that area for August 2002 are as follows:
Total Units of Cost
Total Costs inDriver Used
Activity AreaAugust 2002in August 2002
1. Customer purchase order processing£ 80,0002,000orders
2. Line-item ordering63,84021,280line items
3. Store delivery71,0001,420store deliveries
4. Carton delivery76,00076,000cartons
5. Shelf-stocking at customer stores 10,240640hours
£301,080
Other data for August 2002 include the following:
GeneralMa and Pa
SupermarketDrugstoreSingle
ChainsChainsStores
Total number of orders1403601,500
Average number of line items per
order141210
Total number of store deliveries1203001,000
Average number of cartons shipped
per store delivery3008016
Average number of hours of shelf-
stocking per store delivery 3.00.60.1
Required:
1.Compute the August 2002 gross-margin percentage for each of its three distribution markets. What is the operating profit of Figure Four?
2.Compute the August 2002 rate per unit of the cost-allocation base for each of the five activity areas.
3.Compute the operating profit of each distribution market in August 2002 using the activity-based costing information. Comment on the results. What new insights are available with the activity-based information?
PROBLEM 11-1A
Continued
4.Describe four challenges Flair would face in assigning the total August 2002 operating costs of £301,080 to the five activity areas.
Instructions:
1.Review the printed template called Problem 11-1 that follows these instructions. Most of the problem data have been entered for you in the data input section of the spreadsheet.
2.There are 18 FORMULAS in the template that you need to provide to complete your analysis. Using the spaces provided below, write the formulas where requested in the template.
FORMULA1______FORMULA10______
FORMULA2______FORMULA11______
FORMULA3______FORMULA12______
FORMULA4______FORMULA13______
FORMULA5______FORMULA14______
FORMULA6______FORMULA15______
FORMULA7______FORMULA16______
FORMULA8______FORMULA17______
FORMULA9______FORMULA18______
3.Click the Lotus or Excel icon from the program manager screen to start the spreadsheet program. Click on the Open File SmartIcon/Button to retrieve the template for the problem. Then enter the 18 FORMULAS where indicated on the template.
Type answers where indicated.
4.Click the Save File SmartIcon/Button to save your work.
5.Click the Print SmartIcon to display the Print dialog box. Click the OK button to print your work.
For Excel users, click the Print Button to print your work.