CASE STUDY: KwikTrain personal training was established in Adelaide six months ago with the purpose of offering two new personal training ("PT") services ("products") to cater for very different types of clients. The first product ("Kick-Start") is three one-hour PT sessions to provide more self- motivated clients who just needed a "kick-start" and/or some technical advice with a personalised program which they could use themselves thereafter. The initial session would set the client up with an exercise program after a brief chat, with the remaining two sessions acting as follow-ups to ensure the client was on track. The second product ("New-You") is for clients who require much more support and consists of a 26-week program comprising: - a detailed first interview and health check including measurements of weight, height, heart rate, blood pressure and body fat percentage. - Two one hour PT sessions per week at a high-end fully equipped gym with an experienced trainer - Two remedial sports massages

The firm charges $249 for the Kick-Start offering (in total) and $179 per week for the 26-week New-You package. The New-You service is also offered as a corporate product for a discounted $4,399 for the full 26 weeks. Corporate clients are also offered two additional massages over the 26-week program. Prices are inclusive of gym charges. For the Kick-Start product, an arrangement with a standard local gym means that the trainer and client can use the gym for a discounted rate of $10 per session (in total for both, paid by KwikTrain) For the New-You product, an arrangement with a high-quality local gym means that KwikTrain trainers and clients can have unlimited access to the gym for an annual fee of $40,000. Both products provide Phone / email support offered daily if clients have queries in between sessions. The personalised health check requires dedicated equipment, software and a qualified nurse. The equipment cost was $10,000 and it is expected to last 5 years with zero residual value. An annual licence fee of $500 is paid for the software plus $2.50 per client. The time taken to complete the health check and interview varies from client to client. The owner-manager of the firm, Harry Kane, is concerned that in the first six months a loss was made despite a higher-than-expected number of clients. The regular accountant has had to go an emergency sick leave but was able to inform Harry that "it looked like there was actually a loss for the first 6 months of around $3,000." To confirm this number and make suggestions to improve the situation going forward Kane decided to employ a management accounting consultant with a proven track record, Sam Kerr, on a short-term contract. On her first day on the job, Kane tells Kerr "I want you to get to the bottom of our initial poor profitability, but I do not want you to buy in expensive 'solutions' which may quickly become out of date and are still prone to error. Also any new systems must be understandable to staff and in some instances the corporate clients, whom we must justify our price to." Kerr has concerns that KwikTrain's pricing is not optimal. She has noticed that whilst the firm sold a larger number than expected of 127 of New-You packages in the six-month period (of which 56 were corporate), they have had a relatively low take-up of the Kick-Start product at just 41. She has also done some basic market research where she has found other trainers charging as little as $40 for a one-off session. As a starting point, Kerr decides to use an Activity Based Costing ("ABC") approach to help assess the cost of each product. From the firm's timesheets and other records, she produces the following information for the previous six months:

Activity Cost Client registration and administration $700 Interview & health check $9500 High-end gym charge $20,000 Sports massage $16,000 PT email / phone support$12,000

Other information: - On average each Kick-Start client takes 5 minutes registration and administration time, each New-You non-corporate client takes 10 minutes and each New-You corporate client takes 15 minutes. - Each New-You client takes an average of 1 hour for the interview and health check, which is conducted by external nurses, not by the PT's. - New-You clients made reasonable use of the email and phone support, requiring an average of 70 minutes support per client over the 6 months period, with Kick-Start clients requiring an average of just 10 minutes each. - Cost classified as facility level includes rental of a small premises, marketing (mostly targeted at corporates), insurance, utilities, office equipment depreciation and miscellaneous expenses. They totalled $28,000 for the six-month period. - Including on-costs the cost of Personal Trainers per hour is $45 for the Kick- Start service and $75 per hour for the New-You product. Required:

Taking on the role of Sam Kerr, create a detailed memo to be sent to Kane, which addresses the following: 3. Sam Kerr uses the ABC approach based on the above data as a 'starting point'. Suggest how else the costing system could be improved? Would any further pricing changes potentially result? (6 Marks)

4. How else (aside from direct benefits from more accurate costing / pricing) could KwikTrain benefit from using an ABC approach? Also outline any costs / problems with implementing and running an ABC system. (4 Marks)