Reference no: EM132509827

Case Study Analysis

Thompson Pte Ltd ("Thompson") has two popular web-based products/services: Eongroup and Eonmart. Both products/services are very popular among youth and young adults aging between 15 and 35. Eongroup services include screening for quality and honorable suppliers (e.g. restaurants, cooking classes, spas, florists, beauty and hair salons) to provide substantial discounts (30% to 50%) within a fixed period of time (e.g. within hours or days) and liaising with the suppliers and its members who can enjoy the benefits. A minimum number of Thompson's members need to be registered and paid for the discounted services in advance as per request from the suppliers in order to enjoy the offer. Suppliers use this service as marketing and/or cash flow generator whereas Thompson like credit card companies gains commission on the transaction (about 2% to 3% depending on the negotiation). Its members will pay directly to Thompson and will get a full refund from Thompson if the discount could not be offered due to an insufficient number of members registered and paid for it.
Eonmart, similar to eBay, allows Thompson's members and selected suppliers to sell and buy products online whereas Thompson also gains a small commission or minimum registration fee. Non-honorable members and suppliers will be reported and will also be barred from the Eongroup services, and vice versa.

In order to support the services, the company has invested heavily in its computer infrastructure and on-line security. It also employs some technical personnel to support the backbone of the system because both services could potentially attract a huge volume of web traffic and transactions within a short time and web design and offer need to be updated regularly in short intervals even within a day. Marketing and sales teams are also working hard to get members and suitable suppliers. In addition to the IT and marketing teams, office administrations including accounting and human capital also play an important role in success. Membership services division handles all member related issues and refunds.

The owner is not sure about the profitability of each service, Eongroup and Eonmsart, therefore has asked his staff to collect the following information:

Division/Products Costs Indirect
labour hours Offers handled No. of employees Information System and Technical Supports

(ISTS) $854,000 21,350 7500 15

Sales & Marketing (S&;M) $825,600 55,000 7500 12

Membership Services (MS) $525,000 17,500 7500 9

Office Administrations (Admin) $498,800 11,000 7500 8 Eongroup $300,000 * 20,000 5000 3

Eonmart $50,000 * 8,000 2500 1 Total 3,053,400 * = Direct

Cost to the Products/Services with details as follows:

Eongroup Eonmart Total 5,000 2,500 5,500 $20 per hour $20 per hour - 3 1 - Number of offers/Advertisements
Direct labour cost - ISTS

Average direct ISTS labour hour per offer Initially, as a small start-up, Thompson uses the traditional direct method to allocate indirect
services costs. The admin division is considered to be the most influential to the strategic direction and operations of the company. Its costs are allocated based on the number of employees in each division and products/services. Other service divisions allocated costs based on indirect labour hours.

Required

Question1 : Determine the product costs for Eongroup and Eonmart using the present accounting system. All calculations are done to the nearest dollar.

Question2 : As an advisor to the CEO of Thompson Pte Ltd, you understand that the cost of the services could be better determined by using Activity-based Costing (ABC). Use the below information to get the costs for Eongroup and Eonmart under ABC.
Cost Driver Activity Levels
Activity Cost Drivers Activity Costs Econgroup Econmart Direct labour cost - ISTS $350,000 3 hr / Ad 1 hr / Ad

Computer processing hours $573,400 2 hr / Ad 0.88 hr /Ad $1,200,000 1,800,000 600,000

Number of refunds $380,000 1,800 100 Number of visits to vendors $550,000 4,800 200

Number of on-line transactions
and payments Total $3,053,400 Keys:
hr = hour
Ad = Advertisement

Question3 : Explain to Thompson's CEO why the product costs are so different after using the ABC method and the reasons for products/services being over- or under-cost in this scenario. (hint: there are several plausible reasons. Identify at least two reasons to get the full mark. limit your answer to a maximum of 100 words.)