Question:
Sandy Star, the owner of Star Bakery, wants to know the profitability of each of her bakery's customer groups. She is especially interested in the State Institutions customer group, which is one of the company's largest customer groups. Currently, the bakery is selling doughnuts and snack foods to ten state institutions in three states. The controller has prepared the following income statement for the State Institutions customer group:
The controller has also provided budgeted information about selling and administrative activities for the State Institutions customer group. For 20x8, the planned activity cost rates and the annual cost driver levels for each selling and administrative activity are as follows:
You have been called in as a consultant on the State Institutions customer group.
1. Calculate the planned activity cost for each activity.
2. Calculate the differences between the planned activity cost and the State Institutions customer group's activity costs for 20x8.
3. From your evaluation of the differences calculated in 2 and your review of the income statement, identify the non value-adding activities and state which selling and administrative activities should be examined.
4. What actions might the company take to reduce the costs of non-value-adding selling and administrative activities?
Transcribed Image Text:
Star Bakery Income Statement for State Institutions Customer Group For the Year Ended December 31, 20x8 Sales ($5 per case X 50,000 cases) Cost of goods sold ($3.50 per case X 50,000 cases) Gross margin Less: Selling and administrative activity costs Operating income (loss) contributed by State Institutions $250,000 175,000 $ 75,000 94,750 customer group ($19,750) Activity Cost Actual Cost Driver Level Activity Make sales calls Prepare sales orders $10 per sales order Handle inquiries Ship products Process invoices Process credits Process bilings and $7 per billing Activity Cost S 3,600 9,000 5,000 50,000 19,000 800 $60 per sales call 60 sales calls 900 sales orders $5 per minute $1 per case sold $20 per invoice $20 per notice 1,000 minutes 50,000 cases 950 invoices 40 notices 1,050 billings collections 7,350 94,750 Total selling and administrative activity costs Activity Cost Rate Planned Annual Cost Driver Level Activity Make sales calls Prepare sales orders Handle inquiries Ship products Process invoices Process credits Process billings and collections $60 per sales cal 59 sales calls $10 per sales order 850 sales orders $5.10 per minute $.60 per case sold 50,000 cases $1 per invoice $10 per notice $4 per billing 1,000 minutes 500 invoices 5 notices 600 billings