Reference no: EM131692530
Glen's Cookies (GC) produces a variety of baked goods that it sells to grocery stores (the grocery channel) or to food service providers (the food service channel). GC is trying to analyze the profitability of its cookie line of products. GC charges the same prices and provides the same promotions to its customers, whether the customer was in the grocery store channel or the food service channel.
GC has recently studied the food service channel and has discovered that this channel can be further refined into specialty cookie shops and industrial providers (cafeterias, hospitals, etc.). GC noticed that sales dollars for its products were relatively constant, but that profits were declining. The company sensed that specialty cookie shops might be more profitable than industrial providers, but really didn't know.
Segmented Income Statements for cookies in the food service channel for last year looked like this:
Cost of Goods Sold includes $142,500 for ingredients, baking, and warehousing and $30,000 for picking, packing, and shipping. The cookies are the same across all segments, so the cost to produce is the same. However, Picking, Packing and Shipping costs vary and are based on the cost for a full pallet. Full pallets cost $75 to pick and ship, where individual orders cost $2.25 per case. There are 75 cases per pallet. Shipping details for last year were:
| Specialty Cookie |
| |
Shops Industrial |
Providers |
Total |
|
Cases Shipped in Full Pallets
|
2,400 |
600 |
3,000
|
|
Individual Cases
|
600 |
11,400 |
12,000
|
|
Total Cases
|
3,000 |
12,000 |
15,000
|
Selling and Admin costs are charged to the food service channel based on the estimated budget amounts. However, Merchandising Costs are the cost of point of sale display kits and cost $ 5.00 each. Last year 3,450 kits were delivered, 90 of them to the Specialty Cookie Shops and the remainder to Industrial Providers.
GC has asked its sales force to track the amount of time spent on selling cookies versus other baked goods. Analysis of this data indicates that the total Selling and Admin expenses allocated to cookies in total should increase from $11,850 to $39,000. This means net income reported as $51,900 is really $27,150 lower. Further analysis indicates that of the total time spent selling cookies, on 1% of that time was spent in Specialty Cookie Shops.
REQUIRED:
1. Identify at least two ways in which the two segments (Specialty Cookie Shops and Industrial Providers) differ from each other?
2. Using Activity Based Costing, restate the segmented income statement.
3. Based on your analysis, what changes would you recommend to GC?