Jason Ackerman is the management accountant for Carey Restaurant Supply (CRS). Beth Donaldson, the CRS sales manager, and Jason are meeting to discuss the profitability of one of the customers, Martha Leone’s Pizza. Jason hands Beth the following analysis of Martha Leone’s activity during the last quarter, taken from Central’s activity-based costing system:

Sales ........................$ 21,840

Cost of goods sold (all variable) .............. 13,090

Order processing (25 orders processed at $ 280 per order) ... 7,000

Delivery (2,500 miles driven at $ 0.70 per mile) ....... 1, 750

Rush orders (3 rush orders at $ 154 per rush order) ....... 462

Sales calls (3 sales calls at $ 140 per call) .......... 420

Profits ....................... $ (882)

Beth looks at the report and remarks, “I’m glad to see all my hard work is paying off with Martha Leone’s. Sales have gone up 10% over the previous quarter!” Jason replies, “Increased sales are great, but I’m worried about Martha Leone’s margin, Beth. We were showing a profit with Martha Leone’s at the lower sales level, but now we’re showing a loss. Gross margin percentage this quarter was 40%, down five percentage points from the prior quarter. I’m afraid that corporate will push hard to drop them as a customer if things don’t turn around.”

“That’s crazy,” Beth responds. “A lot of that overhead for things like order processing, deliveries, and sales calls would just be allocated to other customers if we dropped Martha Leone’s. This report makes it look like we’re losing money on Martha Leone’s when we’re not. In any case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Martha Leone’s is a very good customer.”

Required

1. Assume that Beth is partly correct in her assessment of the report. Upon further investigation, it is determined that 10% of the is determined that 10 % of the order processing costs and 20% of the delivery costs would not be avoidable if CRS were to drop Martha Leone’s. Would CRS benefit from dropping Martha Leone’s? Show your calculations.

2. Beth’s bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Beth have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this?

3. Should Jason rework the numbers? How should he respond to Beth’s comments about making Martha Leone’s look moreprofitable?