SuperSol is a grocery company with stores throughout Spain. Suppose the company is planning an expansion of its store in central Madrid. A preliminary analysis has shown the packaged food department to be the most profitable, so the company plans to increase its space the most.

Assume that the Madrid store has just three departments: produce, packaged food, and meat. The most recent annual report for the store showed sales of €4,160,100, which generated a gross margin of €960,100. Sales and gross margins of the three departments were as follows:

In addition to cost of products sold, the store has €800,000 of support costs, so operating income is €960,100 – €800,000 = €160,100. SuperSol currently uses an accounting system that uses cost of products sold as a cost-allocation base for allocating support costs.

Francisco Ramirez, controller of SuperSol, recently attended a seminar on activity-based costing. He suggests that SuperSol management should undertake further analysis before deciding which product gets the largest increase in space in the expansion. He has asked you, his assistant, to lead this analysis.

1. The starting point of your analysis is to determine product profitability under the existing cost accounting system. Compute the operating income and the operating income as a percent of sales for each department using SuperSol’s existing system. Use this information to assess the relative profitability per euro of sales of each of the three departments.

2. Ramirez asks you next to develop product costs using an activity-based accounting system. You determine that there are five major activities, each with a different cost driver to be used as a cost-allocation base:

a. Ordering—Placing of orders for purchases

b. Delivery—Physical delivery and receipt of merchandise

c. Shelf-stocking—Stocking of merchandise on store shelves, including ongoing restocking

d. Customer support—Assistance to customers, including check out and bagging

The cost drivers for each activity are as follows:

Ordering ……………………….. Number of purchase orders

Delivery ………………………………. Number of deliveries

Shelf-stocking ……………………….. Hours of stocking time

Customer support ……………………… Number of items sold

Produce monitoring … Direct trace to the Produce Department

You have determined the following information about the cost drivers:

The total cost of each activity was as follows:

Ordering ……………. € 67,870

Delivery ……………. 179,200

Shelf-stocking ……… 128,858

Customer support …… 245,440

Produce monitoring … 178,632

Total ………………. €800,000

Using these data and activity-based costing, calculate the operating income and operating income as a percent of sales for each product. (For example, note that each purchase order costs €67,870 ÷ 6,170 = €11 to process.)

3. Propose a strategy for expansion. Which information, that based on the current costing system or that based on the activity-based costing system, is most useful? Why? What additional information would you like to have before making a more definitive recommendation on an expansion strategy?

Transcribed Image Text:

Packaged Food Produce Meat Total 497,700 2,100,000 1,562,400 4,160,10x Revenues Cost of products sold Gross margin 1,280,000 320N 3200x01600,000 177,700 3.210 0X e 500,000 282,400 960,100 Number of purchase orders Number of deliveries Hours of shelf-stocking Items sold Produce 1.400 1,240 Packaged Food 3,300 8,770 2,120 Total 6,170 11,200 3,391 440,800 122,700 613,600 Meat 1,470 1,190 1,053 218 50,100)