Question

Sleepeze Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Sleepeze's customer activity are as follows:

	Large Retailer		Smaller Retailers
Units purchased	108,000		72,000
Orders placed	36		3,600
Number of sales calls	18		882
Manufacturing costs	$43,200,000		$28,800,000
Order filling costs allocated*	$1,455,127		$970,085
Sales force costs allocated*	$719,820		$479,880
*Currently allocated on sales volume (units sold).

Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver.

Required:

Assign costs to customers by using an ABC approach. Round your answers and all intermediate calculations to the nearest dollar.

Order filling rate	$ per order
Selling call rate	$ per sales call
Cost assignment:
Large retailer	$
Smaller retailers	$

Answer 1

Solution:

Determination of activity rate for each activity & allocation of cost using ABC
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate		Large retailers		Small retailers
						Usage	Allocated Costs	Usage	Allocated Costs
Order filling	$2,425,212.00	Nos of orders	3636	$667.00	Per order	36	$24,012.00	3600	$2,401,200.00
Sales force costs	$1,199,700.00	Nos of sales calls	900	$1,333.00	Per sales call	18	$23,994.00	882	$1,175,706.00
Total	$3,624,912.00						$48,006.00		$3,576,906.00