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Mini Case

Quick Supply distributes office supplies to small to medium sized offices throughout the Region of Waterloo, Ontario. Quick Supply sets its prices by marking up its cost of goods sold by 5%. For example, if Quick Supply paid $100 to buy supplies from manufacturers, Quick Supply would charge its customers $105 to purchase these supplies.

For years, Quick Supply believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits, Quick Supply decided to implement an ABC system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities, as shown below:

Activity Cost Pool	Activity Measure	Total Cost		Total Activity
Customer deliveries	Number of deliveries	$	400,000	5,000	deliveries
Manual order processing	Number of manual orders		300,000	4,000	orders
Electronic order processing	Number of electronic orders		200,000	12,500	orders
Line item picking	Number of line items picked		500,000	400,000	line items
Other organization-sustaining costs	NA		600,000
Total selling and administrative expense		$	2,000,000

Quick Supply gathered the data below for two typical offices that it servesCity Office and County Office (both offices purchased a total quantity of office supplies that had cost Quick Supply $30,000 to buy from manufacturers):

	Activity
Activity Measure	City Office	County Office
Number of deliveries	9	13
Number of manual orders	0	10
Number of electronic orders	11	0
Number of line items picked	75	90

Required:

1. Compute the total revenue that Quick Supply would receive from City Office and County Office.

2. Compute the activity rate for each activity cost pool.

3. Compute the total activity costs that would be assigned to City Office and County Office.

4. Compute Quick Supplys customer margin for City Office and County Office. (Hint: Do not overlook the $30,000 cost of goods sold that Quick Supply incurred serving each office.)

5. Describe the purchasing behaviours that are likely to characterize Quick Supplys least profitable customers. How to improve customer profitability?

6. Which is the most profitable customer? Explain why.

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