46. LO.4 & LO.S (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 warchouse remains relatively full, revenues have not kept pace with operating costs. Recently, Lipscomb asked his ac- countant, Jenna Etheridge, to improve his understanding of how activity-based costing could help him revise the pricing formulla. 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 Send/receive goods Monthly Volume Measure Weight in pounds Cost ss0.000 5o0.000 Store goods 16000 Volume in cubic feet 80.000 Move goods 20,000 Volume in scuare feet 5,000 Identify goods 8.000 Number of packages 500 Source: Adapted fromHarold PRoth and LincaT Sims Costing forWarehousing and Distribution Management Accounting (August 1991, pp 42-45. Reprinted from Management Accounting Copyright by Institute of Management Accountants, Montvale, NJ a Based on the activity cost and volume data, determine the amount of cost assigned to the following customens, whose goods were all received on the finst day of last month: Weight of Order in Pounds Customer Cubic Feet Square Feet Number 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 cach 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 warchouse services? Explain.
46. LO.4 & LO.S (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 warchouse remains relatively full, revenues have not kept pace with operating costs. Recently, Lipscomb asked his ac- countant, Jenna Etheridge, to improve his understanding of how activity-based costing could help him revise the pricing formulla. 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 Send/receive goods Monthly Volume Measure Weight in pounds Cost ss0.000 5o0.000 Store goods 16000 Volume in cubic feet 80.000 Move goods 20,000 Volume in scuare feet 5,000 Identify goods 8.000 Number of packages 500 Source: Adapted fromHarold PRoth and LincaT Sims Costing forWarehousing and Distribution Management Accounting (August 1991, pp 42-45. Reprinted from Management Accounting Copyright by Institute of Management Accountants, Montvale, NJ a Based on the activity cost and volume data, determine the amount of cost assigned to the following customens, whose goods were all received on the finst day of last month: Weight of Order in Pounds Customer Cubic Feet Square Feet Number 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 cach 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 warchouse services? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Concept explainers
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
Transcribed Image Text:46. LO.4 & LO.5 (ABC; pricing) Bernie Lipscomb owns and manages a commercial
cold-storage warchouse 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 ac-
countant, 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
Store goods
$50,000
Weight in pounds
500.000
16,000
Volume in cubic feet
80,00
Move goods
20,000
Volume in square feet
5,000
Identily goods
8,000
Number of packages
500
Source: Adapted from Harold P.Roth and Linda T. Sims,"Costing for Warehousing and Distribution
Management Accounting (August 1991), pp 42-45. Reprinted from Management Accounting.
Copyright by Institute of Management Accountants, Montvale, NJ.
a. Based on the activity cost and volume data, determine the amount of cost assigned to
the following customen, whose goods were all received on the first day of last month:
156
Weight of Order
in Pounds
Number of Packages
Customer
Cubic Feet Square Feet
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 cach 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
warchouse services? Explain.
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