1.

Case Study 5

Jason Ackerman is the management accountant for Central Restaurant Supply (CRS. Beth
Donaldson, the CRS sales manager, and Jason are meeting to discuss the profitability of one of the
customers, Mama Leone's Leone's Pizza. Jason hands Beth the following analysis of Mama Leone's
activity during the lastquarter, taken from Central activity-based costing system:
Sales $23,400
Cost of goods sold (all variable) 14,025
Order processing (25 orders processed at $300 per order) 7,500
Delivery (2,500 miles driven at $0.75 per mile) 1,875
Rush orders (3 rush orders at $165 per rush order) 495
Sales calls (3 sales calls at $150 per call) 450
Operating income $ (945)
Beth looks at the report and remarks, "I'm glad to see all my hard work is paying off with Mama
Leone's. Sales have gone up 10 % over the previous quarter!"
Jason replies, "Increased sales are great, but I'm worried about Mama Leone's margin, Beth. We
were showing a profit with Mama Leone's at the lower sales level, but now we're showing a loss.
Gross margin percentage this quarter was 40 %, down five percentage points from the prior quarter.
I'm afraid that corporate will push hard to drop them as a customer if thingsdon't turn around."
"That's crazy," Beth responds. "A lot of that overhead for things like order processing, deliveries, and
sales calls would just be allocated to other customers if we dropped Mama Leone's. This report
makes it look like we're losing money on Mama Leone's when we're not. In any case, I am sure you
can do something to make its profitability look closer to what we think it is. No one doubts that Mama
Leone's is a very good customer."
Requirements
Assume that Beth is partly correct in her assessment of the report. Upon further investigation, it is
determined that 10 % of the order processing costs and 20 % of the delivery costs would not be
avoidable if CRS were to drop Mama Leone's. Would CRS benefit from dropping Mama Leone's?
Show your calculations.
Beth's bonus is based on meeting sales targets. Based on the preceding information regarding gross
margin percentage, what might Beth have done last quarter to meet her target and receive her
bonus? How might CRS revise its bonus system to addressthis?
Should Jason rework the numbers? How should he respond to Beth's comments about making
Mama Leone's look moreprofitable?
Solutions

Refer to the below images for the above asked questions, in a detailed way of solution with
explanation.
Case Study 5.2
1. Calculation of the total expected manufacturing cost per unit of making CMCBs in 2015

Here in the Question, the Variable cost per unit of CMCB and total Fixed cost incurres in the year
2017 and expected cost for 2018 is clearly given. The expected need for the product is also given as
10,000 units for 2018.

1. So, for answering the first part of the question (i.e.,) to calculate expected total and variable cost
of manufacturing CMCB for 2018
a. Take the cost per unit for all Variable items ( Material & Labour) and Multiply with no. of units to be
manufactured to get total of these cost. because these costs are varies per unit.

b. For Varible Batch setup cost Multiply cost per batch with total no. of batches to be made. because
these costs are varies per batch. for 2018 the svenson manufactures 80 batches of 125 units in each
batch.
c. Both the Fixed manufacturing remains the same for 2017 and 2018 because as the name
suggests it is fixed and does not change. take the total cost and divide by no. of units produced for
2018 to get cost per unit.

Following the above steps, we get the following answer:

10,000 unit
(80 batches Total Manufacturing Manufacturing cost per
Units * 125) costs of CMCBs unit

[A] [B] [C= B/A]

$1,700,000
Direct material (170*10,000) $170

$450,000
Direct manufacturing labor (45*10,000) $45

Variable Batch Manufacturing costs

per batch (for setup, materials, $120,000
handling, QA) (1,500*80) $12

Fixed Manufacturing costs (not

change):

Avoidable fixed manufacturing costs $320,000 $32

Unavoidable fixed manufacturing costs $800,000 $80

Total manufacturing cost $339

2. Choose the best option

We need to calculate the total cost that will be incurred if Svenson buy CMCB from Minton and also
calculate total cost that will be incurred if svenson manufactures CMCB themselves.

Then, compare both the cost and choose the option that has low cost compared to the other.

As far as calculating the cost is concerned,

a. we have already calculated Total Manufacturing cost that will be incurred by svenson if they
manufactures CMCB , so we are going to take the amounts from the above table.

b. For calculating Cost if svenson buying CMCB from Minton, All the Variable cost and Avoidable
fixed cost will not be incurred but Unavoidable fixed cost is the cost which svenson has to incur
whether they manufacture CMCB or not so in calculating the total cost we have to add the purchase
cost of buying CMCB from Minton and the unavoidable Fixed cost.

Cost of manufacturing and Buying 10,000 units of CMCB for 2018

If making CMCB, the unit cost is $259, then it is less than unit cost of buying ($300). Hence Svenson
will reject buy proposal.

3. Choose the best option

3. So, for answering the Third part of the question (i.e.,) should svenson buy CMCB from minton:
a. In the first row we are shoeing the total cost of manufacturing or buying CMCB, which we have
already calculated in the second part of the question. even if we manufacture CB3s we need to incur
cost of buying CMCB from Minton then only we can use that facility to manufacture CB3s. so in the
3rd column for cost of CMCB we are taking the cost from buy option of second table.

b. In the second row we are showing the Excess of future cost over future revenue in case we
manufacture CB3s. so, for the first 2 column we this cost is not applicable because those are the 2
options for svenson where they do not manufacture CB3s.

Make CMCBs Buy CMCBs &

& Do not Do not make Buy CMCBs &
make CB3s CB3s make CB3s
(1) (2) (3)

Total Incremental cost of making/buying CMCBs $2,590,000 $3,000,000 $3,000,000

Excess of future costs over future revenue from

CB3s [$2,150,000 revenue -$2,000,000 cost] $150,000

Total relevant cost $2,590,000 $3,000,000 $3,150,000

Based on these results, option (1) is the optimal choice. Make CMCBs & Do not make CB3s

From the above calculations it is clear that Svenson should manufacture CMCB themselves and not
buy it from Minton even if that facility can be used to manufacture CB3s because buying CMCB and
manufacturing CB3s only increases their cost.

Svenson will minimize cost by $5,60,000.