Applying ABC Methods to Customer Profitability Analysis

Bountiful Harvest Distribution delivers supplies to small grocers throughout the region. Bountiful currently allocates order and delivery service costs based on a percentage of total revenue. Estimated revenue for the year is $5.16 Million. A consultant has analyzed the order and delivery service costs and identified four activities. Data on these activities are:

Activity

Cost Driver

Cost

Driver Volume

Process order

number of orders

$50,000

4,000 orders

Load truck

number of items

$100,000

80,000 items

Deliver goods

number of orders

$60,000

4,000 orders

Process invoice

number of invoices

$48,000

6,000 invoices

Total overhead

$258,000

Three of Bountiful's customers are Rosy's Corner Market, Katy's Fine Foods, and Amy's City Market. Below are data on expected orders and deliveries to these three customers:

Rosy's

Katy's

Amy's

Revenue

$60,000

$90,000

$150,000

Cost of supplies sold

$48,000

$64,000

$120,000

Number of orders

50

300

25

Number of items

550

1,600

1,750

Number of invoices

12

600

18

Required:

1.Determine the gross profit (revenue less cost of supplies sold less cost of order and delivery service) for each of the three customers under the current allocation method.

2.Determine the gross profit (revenue less cost of supplies sold less cost of order and delivery service) for each of the three customers under the proposed ABC allocation method.