Product Line Profitability Analysis

5-48    Product Line Profitability Analysis Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks

that the store will improve its profitability if they discontinue the Other Flooring Products line. The operating results from the most recent period are:

SPF estimates that store support expenses are approximately 28.5 percent of revenues.

Harish Rana, SPF’s controller, states that not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows:

Activity (cost driver)                                               Paint & Paint

Supplies         Carpet

Other Flooring Products

Order processing (number of purchase orders)                             110            200             25

Receiving (number of deliveries)                                         40            120             10

Inventory management (number of hours per delivery)                    10             40              6

Customer support (hours required per sale)                                  0.50           8.50           0.25

Harish estimates activity-cost rates for each activity as follows:

Order processing                     $135 per purchase order

Receiving                             180 per delivery

Inventory management                30 per hour

Customer support                      15 per hour

Required

1.    Prepare a product-line profitability report for SPF under the current costing system.

2.    Prepare a product-line profitability report for SPF using the ABC information the controller provides.

3.    What new insights does the ABC system in requirement 2 provide to SPF managers?