Question

Applying ABC Methods to Customer Profitability Analysis

Bountiful Harvest Distribution delivers supplies to small grocers throughout the region. Bountiful currently allocates order and delivery service costs based on a percentage of total revenue. Estimated revenue for the year is $5.16 Million. A consultant has analyzed the order and delivery service costs and identified four activities. Data on these activities are:

Activity	Cost Driver	Cost	Driver Volume
Process order	number of orders	$50,000	4,000 orders
Load truck	number of items	$100,000	80,000 items
Deliver goods	number of orders	$60,000	4,000 orders
Process invoice	number of invoices	$48,000	6,000 invoices
Total overhead		$258,000

Three of Bountiful's customers are Rosy's Corner Market, Katy's Fine Foods, and Amy's City Market. Below are data on expected orders and deliveries to these three customers:

	Rosy’s	Katy’s	Amy’s
Revenue
Cost of supplies sold	$48,000	$64,000	$120,000
Number of orders	50	300	25
Number of items	550	1,600	1,750
Number of invoices	12	600	18

Required:

No revenue for each customer

We have to calculate what the revenue is based on the information given

1. Determine the gross profit (revenue less cost of supplies sold less cost of order and delivery service) for each of the three customers under the current allocation method.
2. Determine the gross profit (revenue less cost of supplies sold less cost of order and delivery service) for each of the three customers under the proposed ABC allocation method.

Answer 1