Bountiful Harvest Distribution: 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 simple percentage of total revenue. Estimated revenue for the year is $5,160,000. A consultant has analyzed the order and delivery service costs and identified four activities. Data on these activities are:

Order and Delivery Service Costs
Activity	Cost Driver	Cost	Driver Volume
Processing orders	number of orders	$50,000	4,000 orders
Loading trucks	number of items	$100,000	80,000 items
Delivering goods	number of orders	$60,000	4,000 orders
Processing invoice	number of invoices	$48,000	6,000 invoices
Total overhead		$258,000

The consultant has suggested analyzing the impact of switching from the traditional cost allocation method to ABC for three customers; Rosy's Corner Market, Katy's Fine Foods, and Amy's City Market. Below are relevant data these three customers:

	Rosys	Katys	Amys
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 (be sure to document your computations):

1. Compute the predetermined order and delivery service cost rate using the traditional, single-pool method currently used by Bountiful.
2. Determine the customer-level 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.
3. Compute the predetermined order and delviery service costs rates using the proposed ABC method.
4. Determine the customer-level 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.
5. Briefly compare your solutions between requirements 2 and 4.