Questions:
ABC; pricing) Bernie Lipscomb owns and manages a commercial cold-storage warehouse that has 100,000 cubic feet of storage capacity. Historically, he has charged customers a flat rate of $0.16 per pound per month for goods stored.
In the past two years, Lipscomb has become dissatisfied with the profitability of the warehouse operation. Despite the fact that the warehouse remains relatively full, revenues have not kept pace with operating costs. Recently, Lipscomb asked his accountant, Jenna Etheridge, to improve his understanding of how activity-based costing could help him revise the pricing formula. Etheridge has determined that most costs can be associated with one of four activities. Those activities and their related costs, volume measures, and volume levels for 2010 follow:
|
Activity
|
Cost
|
Monthly Volume Measure
|
|
Send/receive goods
|
$50,000
|
Weight in pounds
|
500,000
|
|
Store goods
|
16,000
|
Volume in cubic feet
|
80,000
|
|
Move goods
|
20,000
|
Volume in square feet
|
5,000
|
|
Identify goods
|
8,000
|
Number of packages
|
500
|
a. Based on the activity cost and volume data, determine the amount of cost assigned to the following customers, whose goods were all received on the first day of last month:
|
Weight of Order
|
|
|
Number
|
|
Customer
|
in Pounds
|
Cubic Feet
|
Square Feet
|
of Packages
|
|
Barfield
|
40,000
|
3,200
|
1,100
|
15
|
|
Glover
|
40,000
|
800
|
600
|
10
|
|
Dozier
|
40,000
|
1,400
|
1,900
|
50
|
b. Determine the price to be charged to each customer under the existing pricing plan.
c. Determine the price to be charged using ABC, assuming Lipscomb would base the price on the cost determined in (a) plus a markup of 40 percent.
d. How well does Lipscomb's existing pricing plan capture the costs for providing the warehouse services? Explain.