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
e. Produce monitoring—Constantly checking on the stacking and freshness of produce
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?

  • CreatedNovember 19, 2014
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