Problem:
ABC wholesale, customer profitability. Villeagas Wholesalers sell furniture items to four department-store chains. Mr. Villeagas commented, We apply ABC to determine product-line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability a well." Villeagas Wholesalers sends catalogs to the corporate purchasing departments on a monthly basis/ The customers are entitled to return unsold merchandise within a six-month period from the purchase data and receiver a full purchase price refunds. The following data were collected from last year's operations:
Chain
1 2 3 4
Gross sales $50,000 $30,000 $100,000 $70,000
Sales returns:
Number of items 100 26 60 40
Amount $10,000 $5,000 $7,000 $6,000
Number of orders:
Regular 40 150 50 70
Rush 10 50 10 30
Villeagas has calculated the following activity rates.
Activity Cost Driver Rate
Regular order processing $20 per regular order
Rush order processing $100 per rush order
Returned items processing $1,000 per customer
Customers pay the transportation costs. The cost of goods sold averages 80% of sales.
Determine the contribution to profit from each chain last year. Comment on the solution.