Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if it discontinues the Other Flooring Products line. The operating results from the most recent period are: Paint and Paint Supplies Carpet Other Flooring Products Sales $ 375,500 $ 201,000 $ 152,000 Cost of goods sold 151,000 128,000 117,000 SPF estimates that store support expenses are approximately 24% of revenues. Harish Rana, SPF’s controller, states that while every sale has one purchase order, not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows: Activity (cost driver) Paint and Paint Supplies Carpet Other Flooring Products Order processing (number of purchase orders) 360 157 120 Receiving (number of deliveries) 48 194 60 Customer support (hours required per sale) 0.60 4.0 0.70 Harish estimates activity-cost rates for each activity as follows: Order processing $ 160 per purchase order Receiving 180 per delivery Customer support 20 per hour Required: 1. Prepare a product-line profitability report for SPF under the current costing system. 2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter5: Inventories And Cost Of Goods Sold

Section: Chapter Questions

Problem 5.7DC

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Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if it discontinues the Other Flooring Products line. The operating results from the most recent period are:

	Paint and Paint Supplies	Carpet	Other Flooring Products
Sales	$	375,500		$	201,000	$	152,000
Cost of goods sold		151,000			128,000		117,000

SPF estimates that store support expenses are approximately 24% of revenues.

Harish Rana, SPF’s controller, states that while every sale has one purchase order, not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows:

Activity (cost driver)	Paint and Paint Supplies	Carpet	Other Flooring Products
Order processing (number of purchase orders)		360		157	120
Receiving (number of deliveries)		48		194	60
Customer support (hours required per sale)		0.60		4.0	0.70

Harish estimates activity-cost rates for each activity as follows:


Order processing	$	160	per purchase order
Receiving		180	per delivery
Customer support		20	per hour

Required:

1. Prepare a product-line profitability report for SPF under the current costing system.

2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.

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