Case Study:

Fashion Enterprises is a family run wholesale company which buys flowers in bulk from
growers in several countries. These flowers are then repackaged into standard boxes and sold
to a range of customers including large retail supermarkets. The company does not sell direct
to the public.
The company always calculated an overall company profit and as the level of profit was
acceptable to the owners, the management has not seen the need to change this approach.
However, recent months have seen both increasing costs and pressure from the large
supermarkets to reduce selling prices. The new Managing Director has therefore decided that
the existing approach to calculating profit is no longer sufficiently informative.
Before the company can even consider the request from the supermarkets to lower prices,
the MD believes that the company should use customer profitability analysis to ascertain the
profit that the company is earning from each of its supermarket customers.
Although the company makes up different combination of flowers for delivery to customers,
an average selling price per box of Rs.5.60 will be acceptable to undertake the necessary
investigation. The average direct cost per box is Rs.2
The following activity data have been collected for the latest period for the four large
supermarkets that the company is in supply with.

Activities A B C D
Boxes of flowers 85 54 72 125
sold (000)
Number of visits 25 10 30 65
by Sales team
Number of 120 300 90 100
orders received
Number of 100 60 150 250
deliveries
Average Miles 35 60 50 20
per delivery
Discount on 2% - 1% 5%
average selling
price
The costs of the above activities were:

Visits by sales team : Rs. 2,73,000

Order Processing : Rs. 1,00,040
Delivery : Rs. 5,39,000
Packing (Box handling) : Rs. 1,51,200

Required:
i) Apply the technique of activity –based management in identifying cost drivers and
activities
ii) Analyze direct customer profitability through the application of activity based costing
ideas.