Happy Kitchen, Inc., produces several lines of dish towels and pot holders that are sold through department stores, grocery stores, and through wholesalers to smaller kitchen shops throughout the United States. The company has traditionally kept track of its sales by product line, but lately has begun to feel it should pay some attention to the different demands of customer segments on its profitability. Department stores and wholesalers are normally content with the prices Happy Kitchen charges, but the grocery store buyers are more demanding. Recently, the company has also started selling product to the wholesale warehouses, such as Costco. Here, price has really become an issue, with the customer demanding small shipments to each of its stores but at a much lower price for a bundled package of goods (such as three dish towels in one sale).Pete Bayou, president of Happy Kitchen, decided to hire a team of consultants to investigate the profitability of each of its customer segments. The study results were broken down by dish towels and pot holders to give the company more information about where things were going well and where attention might need to be paid. The consulting team also used internal information to develop the “as is” budget for each segment of business so the results could be compared with plan. It did not address fixed overhead because it was felt to be out of the control of the product lines. The results of the consulting team’s study are in the following tables.

What surprised the president of Happy Kitchen was the fact that profitability on pot holders was so much lower than had originally been thought. The addition of ABCM costs to the analysis had really made a difference. What was also of concern was the fact that the warehouse stores were not carrying their fair share of general overhead yet. If that had been raised to be equivalent to the other segments, it is doubtful it would have shown any profits at all.

Pete really wants to dig a bit further into this analysis and has asked you to come in and give a hand. What Pete needs you to do is the following.

REQUIRED:

a. Prepare a variance analysis report for the two products across their four customer segments.

b. Analyze the results and note where Pete should place his attention and where things are going okay.

c. What should Pete do about the warehouse store sales? They have added a lot of volume to the business, leading to the need to put on another shift in both products and add staff to the back office. If the volume is eliminated, quite a few employees will have to be laid off.

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Happy Kitchen, Inc. Customer Profitability Analysis-Kitchen Towels Company Total Budget Department Stores Wholesalers Grocery Stores Warehouse Stores Budget Actual Budget S0000 SE,00 S,00 S3000 SEO00 SE,00 sz000 S25,000,00 S65,00 S89,000,00 Actual Budget Actual Budget Actual Actual Units sold Revenue $25,0000 S24,700,000 S350,000 S3,00 SZ0,700,00 SK,500,00 S20000 SZAJ50,000 S78,950,000 SO, 950,000 Less: Cost of goods sold sz000 SZ, 1300 S,00 SR, 10,00 s0300 $8,45,000 SL30,00 SK, BO,000 S38,650,000 $5,78,000 Gross margin SRO00 S2,597,000 SK250,000 SR,890,00 SD,30,000 SE,085000 STO0,000 S7600,000 SA03000 SAR 1T2,000 Less: SG&A SUSO,000 SLJDO00 S25000 S300 SLO0,00 SLS00,0 SL200 SLDO00 s1300 SLS00,00 Order processing costs SZO00 sz000 S6,050000 S,300,0 Sales calls SPOD,000 S80,000 S800,00 S3,AR0,00 $4,200,000 Invoicing SLSO0,00 SLJS0,000 SLO00 S2000,0 SL200,000 SLSO0,0 S30,000 S800,000 S4,530,000 S6050,000 Customer service SL0,00 SLS00,00 S2000 SZ200 S2 400,000 S2600,00 SZ5,000 s1300,000 $6,15,000 S7500,00 General overhead S3000,00 s30000 S3,500,00 3,500,00 S2070,00 S2O0,00 S20,000 S200 $8,70,000 S8,70,000 Total SG&A S9,050,000 $9,50,000 SLDO,00 SZ200 $8, TO,000 S8A70,000 $635,000 $5, 00,00 S28,955,00 $34,920,000 Income before tax S3,950,000 $3447000 $6, B0,000 S7,690,000 $2,180,000 S(385,000) $65,000 $2,500,000 SIL345,000 S3252,000 Profit percentoage 19.72% 14.3% 5.80% 6.48% -233% 3.29% 10.53% 12.75%