Reference no: EM132431836

Question -

Part A: AguaDrench CPA analysis (based on sales)

AguoDrench manufactures water pistols for sale in leading toy retailers, by far their most popular model is the 'Amphitrite'. The product features of this model include a 10 litre water storage capacity (this is strapped to the user's back) and an automatic rapid fire option for pure drenching power. AgudDrench also produces a second model, the 'Poseidon', which is reputed to be the longest shooting water pistol on the market. The price (wholesales price to the toy stores] and cost of goods sold per unit for ach of these products are as follows"

	Amphitrite	Poseidon
Price per unit	$100	$50
Cost of goods sold per unit	60	40
Gross profit per unit	$40	$10

In addition, the company incurs customer-related selling & general admin. (SG&A) expenses of $450,000. The company wishes to assign these costs ti its three retail customers, Tru Kids, Toyworld, and Kidstuffs. The annual volumes to these customers (in units) are:

Retailer	Amphitrite Sales Volume	Poseidon Sales Volume
Tru Kid	9,500	5,000
Toyworld	10,000	7,000
Kidstuffs	4,500	4,500

Required - Prepare a report showing the relative profitability of each customer, allocating customer-related expenses based on sales dollar. Compare the relative contribution of each customer to gross profit before and after the allocation of customer-related expenses (as a percentage of the total amount). How would you rank these customers based on this report?

Part B: AguaDrench CPA analysis {using activity-based-information)

Further analysis has revealed that the customer-related expenses ($450,000) are related to three major activities: customer service, sales order processing [the retailers manually order stock and when they require it), and advertising support. The advertising support is in the form of advertisement that are places by AguoDrench to support the retailer's further sales of Aqua-Drench products to customers. The full-time equivalent (FTE) and activity drivers associated with these activities are:

	FTE	Activity Driver
Customer service	50	No. of service requests
Sales order processing	40	No. of Sales Orders
Advertising support	10	No. of Ads Placed
Total	100

[Note: full time equivalent is a measure of the effective number of full time labor resource allocated, based on total time and fractional {casual and part time) labor used for each activity]

Toyworld require extensive support in the form of sales order processing 9 orders are received from each individual store rather than from central point of contact) service, and advertising support, as can be seen from the following activity information:

	Tru Kids	Toyworld	Kidstuffs	Total
No. of service requests	10	55	185	250
No. of Sales Orders	12	48	90	150
No. of Ads Placed	20	50	130	200

Required -

a. Prepare a customer profitability report using activity-based information.

b. How does your assessment of profitability differ from the previous report?

c. If the relative profitability of the three customer has changes, why is that the case?

d. What recommendations would you make regarding the management of each of these three customers?