EXERCISES COST MANAGEMENT
QUESTION 1: Customer Profitability Analysis
Salt & Pepper (S&P) is a wholesale business of clothing. S&P purchases clothing in large
lots and resells the clothing in smaller lots to departments stores (e.g. INNO) and own
boutiques. The own boutiques have been launched a few years ago and are considered as the
eye-catchers of the brand name. The boutiques’ turnover increased gradually over the years.
At present the customer base consists of 50 department stores and 10 boutiques.
S&P realized good profit figures in the past, but recently profitability is decreasing.
Consequently, S&P’s management requires an investigation. At the moment, rate-based
activity based costing (ABC) is used for cost pricing and budgeting. The yearly budget for
indirect costs is presented in the table below.
Activity Activity Driver Activity driver
rate
Activity driver
volume per
department store
Activity driver
volume per
own boutique
Telephonic
request for info
with S&P
N° of phone
calls
€ 15 40 350
Visit from a
S&P represent.
N° of visits € 250 2 4
Order
processing
N° of orders € 20 25 150
Packaging N° of deliveries € 100 28 150
Delivery N° of deliveries € 150 28 150
S&P also incurs fixed exploitation costs (not shown in the table) that are specifically related
to the own boutiques which work under a franchising arrangement: S&P has personnel to
perform the franchising administration, S&P owns the boutique buildings being subject to
depreciation, …, giving rise to a fixed exploitation cost of € 250 000 per boutique. These
costs cannot be avoided.
Concerning next year, the following information was estimated:
Department stores Boutiques
Turnover that S&P realizes per store € 52 000 € 994 000
Mark-up that S&P sets on top of the clothes’ purchase price 30% 40%
N° of stores 50 10
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