Analysis for Towels & More Common costs refer to the cost of resources used by multiple divisions, departments, or another type of grouping.
Analysis for Towels & More
Common costs refer to the cost of resources used by multiple
divisions, departments, or another type of grouping. These types of
overhead costs are not only incurred within a profit center, but in
many other parts of the organization. One example is overhead or
common fixed costs for distribution and client support. We're using
the latter for some hands-on experience in allocating common costs
and analyzing the implications for T&M. Information follows below.
Towels & More (T&M) is a small family company that produces and
sells towels. T&M sells the towels to three types of stores: major
retailers, specialty retailers and gift shops. The company is doing
well and the CEO wants to expand the business. The contribution
margin ratio is the highest for the small gift shops, so the CEO feels
that those are the type of retail outlets to pursue.
Below find T&M’s income statement for last year.
Towels & More
For the year ended 12-31-XX Sales $600,000 Variable Production Costs 180,000 Contribution Margin $420,000 Fixed Costs:
Selling & Distribution Costs
Net Operating Income $120,000
====== Customer support & distribution costs are pretty high at T&M. The
total amount was $240,000 last year. The marketing manager has
recently been to a seminar and learned about applying ABC to
analyze customer and distribution costs. He suggests that the
company analyze overhead costs associated with supporting different types of customers before proceeding with an expansion.
The marketing manager knows that the small shops require a lot of
attention and is somewhat dubious about the CEO's proposed
strategy. The CEO accepts the suggestion and you are brought in
as a consultant to prepare the analysis. The table below provides
some information that may be pertinent for the analysis. Description Customer Support
& Distribution Costs Sales (units)
No. of customers Department
Shops Gift Shops Activity Level Activity
Level 10,000 5,000 5,000 $200,000 $100,000 $300,000 50% 80% 80% 5 45 250 Total costs/No. of
orders places $40,000 10 90 900 Total costs/No. of
sales calls $80,000 5 195 800 Total costs/No. of
shipments $120,000 20 480 1,000 Note that the contribution margin ratio varies due to different quality
of towels sold to the stores.
Computations (use Excel). Calculate the customer support and distribution costs associated with
the three types of customers. Use a simple strategy first and allocate the costs based on revenues. Recalculate the allocations using activity based costing (ABC) based
on the information in the table above. Determine contribution margin less customer support and distribution
costs for both approaches above.