Assignment Information
Alain Bookshop and Café (ABC) is a large city bookstore that sells books and music CDs and has a café. ABC operates at capacity and allocates selling, general and administration costs to each product line using the cost of merchandise of each product line. ABC wants to optimize the pricing and cost management of each product line. ABC is wondering if its accounting system is providing it with the best information for making such decisions.
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Alain Books and Café
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Product Line Information
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For the Year Ended December 31, 2014
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Books
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CDs
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Café
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Revenues
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$3,720,480
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$2,315,360
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$736,216
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Cost of merchandise
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$2,656,727
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$1,722,311
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$556,685
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Cost of café cleaning
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$18,250
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Number of purchase orders placed
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2,800
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2,500
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2,000
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Number of deliveries received
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1,400
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1,700
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1,600
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Hours of shelf stocking time
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15,000
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14,000
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10,000
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Items sold
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124,016
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115,768
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368,108
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ABC incurs the following selling, general and administration costs:
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Alain Books and Café
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Selling, General, and Administration Costs
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For the Year Ended December 31, 2014
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Purchasing department expenses
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$474,500
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Receiving department expense
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$432,400
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Shell stocking labour expense
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$487,500
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Customer support expense (cashiers and floor employees)
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$91,184
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$1,485,584
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Required
1. Prepare product line and total company income statements, assuming that ABC uses cost of merchandise to allocate all selling, general and administration costs.
2. Identify and explain an improved method for allocating each of the selling, general and administration costs to the three product lines.
3. Prepare product line and total company income statements, using the method you have identified in 2. above to allocate all selling, general and administration costs.
4. Compare your results in 3 above with those in 1 Above.
5. Write a memo to ABC management describing how the improved system you propose might be useful for managing the store. [The memo must be written using a formal memo format. Refer to business communication books for guidance].