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As president and primary owner of Johnson Beverage, Inc. (JBI),…
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Allocation Rates for Customer Service Activities (From Tables 1 and 2 and case data) Area of Activity Total $
(Table 1) Cost Driver Quantity of Driver Allocation rate Product Handling $672,000 Number of cases sold
800000 $ 0.84 per case Taking orders from customers Jumber of purchase orders Delivering the pr…
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As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was
beginning to realize that retaining long-term customers was becoming a challenge. During a
delivery run yesterday, driver Joe Stevens had noticed a competitor’s sales manager talking with
the general manager of Saver Superstore, one of JBI’s largest customers. Then, that morning,
Johnson’s sales manager, Marsha Ketchum, had mentioned that, during her visit with the same
general manager on Wednesday, he was starting to make some noises about wanting to negotiate
a lower price. This could cause a dilemma because this customer had been one of the company’s
largest and most loyal customers for years.
Johnson leaned back in his chair. These things always seemed to come up on Friday
just in time to monopolize his thoughts over what otherwise would have been a restful weekend.
Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and
several others for later that afternoon.
Company Background
JBI distributed beverages to retail customers. The company had been in business for two
decades and had become a preferred distributor among several retail outlets in the local area. JBI
primarily distributed bottled sports drinks made by small specialty beverage companies, and its
business had grown steadily with the popularity of sports drinks over the past 10 to 20 years.
Last year, JBI’s revenues totaled $12 million. The company serviced about 20 customers
whose beverage purchases totaled anywhere from about $100,000 to over $1 million annually.
The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24
bottles. The full cost (excluding customer service costs) of the bottled drinks was $13.10 per
case. The company offered discounts to some of its customers, which varied by customer based
on a number of factors, including the volume of drinks the customer purchased, the future
potential of the customer, and the negotiating success of the company’s sales representative,
among others.
Use the information in case Exhibits 1 and 2 and other necessary data in the case on activities and costs to develop an Activity-Based Cost system for JBI, i.e., how much each activity is costing JBI for each customer. Excel templates are available (Sheets 1 and 2) to guide your work.
Use this ABC system to determine customer profitability for Saver Superstore, Oscar’s Oddlots, Midewellen Supermarket, and Downtown Retail (Sheet 2 of the provided template).
Use your results from Sheet 2 to compare customer costs and profits of the traditional costing system to the ABC system you have designed in (1). According to your ABC system, would you recommend entertaining a lower price to Saver SuperStore?
