Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 495

11.31 Profit effect of price change   LO6

The accountants at French Perfumery decided to increase the price of a scent called Breezy by

10 per cent, from $6 per bottle to $6.60. French Perfumery’s accountants expect the 10 per cent

price increase to reduce unit sales by 20 per cent. Current sales are 200 000 bottles, and total

variable costs are $800 000.

Required

a. Identify both cost-based and market-based reasons why the accountants raised the price of

Breezy.

b. How certain can the accountant be that volume will decline 20 per cent if the selling price

increases to $6.60? What effect does this uncertainty have on the accountants’ decision to

increase the selling price?

11.32 Customer profitability analysis   LO3, 4

The Tempting Cheesecake Company supplies cheesecakes to three large supermarket chains

throughout Australia. Management has become concerned about the rising costs associated with

the processing and dispatch of orders. An activity analysis of the indirect costs identified the

following customer-related costs.

Use of cost driver

Supermarket

customer

Activity cost pool Cost driver 1 2 3

Estimated

indirect costs

Total expected

use of cost

driver*

Orders processing Number of orders $200 000 450 300 100 50

Returns

processing

Number of returns $ 50 000 100 50 25 25

Delivery Number of deliveries $100 000 700 400 200 100

Rush orders Number of rush orders $ 70 000 50 10 20 20

Sales visits Number of visits $ 20 000 100 50 25 25

*Expressed in units of measure of the driver.

Sales are marked up 50 per cent on cost.

Required

a. Draw a diagram showing the structure of the proposed costing system.

b. Calculate the gross profit for each customer.

c. Calculate the activity cost rate for each activity.

d. Assign the activity costs to each of the three customers.

e. Calculate the contribution for each customer if the sales pattern for each is as follows:

Customer 1 — $900 000; Customer 2 — $450 000; Customer 3 — $650 000.

f. Discuss the difference between the analysis in part (b) and part (e).

g. Advise the management of the Tempting Cheesecake Company as to whether any changes

should be made in its relationships with customers.

11.33 Cost system design — activity analysis    LO1, 2, 3, 4

Suppose that Elite Daycare provides two different services — full-time childcare for pre-schoolers,

and after-school care for older children. The director would like to estimate an annual cost per child

in each of the daycare programs, ignoring any facility-sustaining costs. She is considering expanding

the services and wants to know whether full-time or after-school care is more profitable.

The following activities and annual costs apply to the daycare centre. Salaries and wages are

$100 000. Full-time children arrive between 8 am and 9 am. Older children arrive about 3 pm.

All of the children are gone by 6 pm. Employees estimate that they spend about 20 per cent of