Reference no: EM13788150

Al's Market, a successful neighbourhood convenience store, plans to expand by increasing the floor space of its building. The store is always busy and the parking lot is often full. Al's sells three major product lines: sodas and beer, dairy and fresh produce, and packaged food. However, the owner (also named Al) wants to be sure that he uses the added floor space to stock the most profitable products. Al's general business model has been to stock organic dairy and produce at prices competitive with the local chain stores in order to draw in customers, and then mark up packaged goods and beverages. Al has some basic financial information for the most recent 12 month period on a product line basis, but is unsure about what to do with the $360,000 in overhead. Here is his basic data:

                                Sodas/Beer         Dairy/Produce        Packaged

Revenues              $320,000             $840,000                $440,000

COGS                     200,000                 700,000                   300,000

Gross Profit             120,000                140,000                  140,000

Items Sold                100,000               500,000                   300,000

Al decides follow his favourite rule of thumb: "Keep it simple, stupid!" Accordingly, he allocates the overhead evenly among the three product lines since he thinks that the time he devotes to each product line is about the same and the amount is easily divisible by three.

However, his wife Alberta, who takes care of the back office and who has many years of experience in the business, decides to call their CPA> After a breif conversation shhe is able to break down the overhead by a few major types of activity and also gather some other information that the CPA suggested may prove useful:

Ordering costs: $67,200

Freight-in and stockroom costs: $102,000

Stocking of shelves: $72,000

Customer assistance, checkout, bagging: $118,000

Total overhead: $360,000

                                    Sodas/Beer       Dairy/Produce      Packaged

Number of POs         150                        300                        150

Deliveries received   300                         900                         300

Hrs of shelf stocking   400                      2,400                     1,200

1. Using Al's rule of thumb which product line should he use to fill the additional floor space?

2. Al looks at the additional information provided by Alberta but decides to ignore her work and focus on refining his analysis by allocating overhead based on the total direct costs of each product line. Which product line should he now use to fill the additional floor space?

3. Alberta is now concerned that the planned expansion might result in a less than optimal result. She decides to ask their CPA for more help. He begins an analysis by computing an allocation rate for each of the activities that make up indirect costs and then allocates the costs of those activities to each product line. The overhead cost allocations to Sodas & Beer, Dairy & Produce, and Packaged Goods, respectively are: