Paul Seto owns and manages a commercial storage warehouse. He stores a vast variety of perishable goods for his customers. Under the existing pricing policy, he has charged customers using a flat rate of $2.40 per kilogram per month for goods stored. His storage warehouse has 10,000 cubic metres of storage capacity.

In the past two years, Seto has become dissatisfied with the profitability of the warehouse operation. Despite the fact that the warehouse remains relatively full, revenues have not kept pace with operating costs. Recently, Seto approached his accountant, Albert Lo, about using activity-based costing (ABC) to improve his understanding of the causes of costs and revise the pricing formula. Lo has determined that most costs can be associated with one of four activities. Those activities and their related monthly costs, volume measures, and volume levels for 2020 are as follows:

Activity Cost Monthly Volume Measure

Send/receive goods $80,000 Weight in kilograms - 50,000

Store goods $8,000 Volume in cubic metres - 800

Move goods $10,000 Volume in square metres - 500

Identify goods $3,000 Number of packages - 500

Lo has also collected last month's information on the following 3 customers whose goods were all received on the first day of last month.

Customers Weight of Order (Kilograms) Cubic Metres Square Metres Number of Packages

Sunshine Co. 20,000 600 30 10

Best Buy Co. 20,000 400 20 40

Chow's Trading 20,000 200 100 160

Seto would like Lo to perform some analyses based on the above information and data in order to evaluate whether to use ABC

a. Determine the price to be charged to each of the 3 customers under the existing pricing policy.

b. Based on the monthly activity cost and volume data provided, determine the amount of costs assigned to each of the 3 customers.

c. Determine the price to be charged to each of the 3 customers using activity-based costing (ABC), assuming Seto would base the price on the cost determined in part (b) plus a markup of 40 percent.

d. Critically discuss whether Seto's existing pricing policy captures the costs incurred to provide the warehouse services.

e. A cost hierarchy categorizes costs into different cost pools on the basis of the different types of cost drivers or cost-allocation bases. Describe the four levels of a manufacturing cost hierarchy under the ABC system with regard to Seto's storage warehouse.

Answer rating: 100% (QA)

a To determine the price to be charged to each of the 3 customers under the existing pricing policy we will use the flat rate of 240 per kilogram per month Customer Sunshine Co Total Price Weight of O... View the full answer