Accounting

Case – Activity Based Management

Gibbons Bath Products (GBP) manufactures and sells a complete line of bath related products. The senior managers are concerned with the profitability of the soap division, and have asked you to look into the situation. Total sales have remained constant; however net profits have been steadily declining over the past 3 years. GBP’s unique soaps are manufactured and sold through two channels, specialty shops in touristy destinations and smaller towns and grocery retail operations with sales throughout major metropolitan areas. The promotion for each channel by sales reps costs the same at $3 per case.

GBP believes that the specialty shops might be more profitable than the grocery retail operation sales as the specialty shops focus more on cost per client, while grocery retail operations focus on cost per square foot. They also have noticed that the specialty shops have been growing at a faster pace than the grocery retail segment of their business.

For the past year, they have put forth the following information:

Category Specialty Grocery Total

Revenues $47,760,000 $11,940,000 $59,700,000

Cost of Goods Sold 27,600,000 6,900,000 34,500,000

Gross Profit 20,160,000 5,040,000 25,200,000

Less: Sales Promotions 7,200,000 1,800,000 9,000,000

Merchandising 2,760,000 690,000 3,450,000

Selling and General Admin 1,896,000 474,000 2,370,000

Net Income 8,304,000 2,076,000 10,380,000

In your analysis of the processes, you noticed that part of the cost of goods sold (shipping costs) totaled $6,000,000. You determined that the cost to ship a full pallet was $150 (containing 150 cases), while shipping individual cases were $2.25 per case. The cost of production of the soap is the same for both.

Other Information:

Number of Cases Sold 2,400,000 600,000

Number of cases sold in full pallets 120,000 480,000

Number...