Dropping a customer, activity-based costing, ethics. Jason ...

[humphriesbr@me.com]

Dropping a customer, activity-based costing, ethics.
 
  Jason Ackerman is the management accountant for Carey Restaurant Supply (CRS). Beth Donaldson, the CRS sales manager, and Jason are meeting to discuss the profitability of one of the customers, Martha Leone's Pizza. Jason hands Beth the following analysis of Martha Leone's activity during the last quarter, taken from Central's activity-based costing system:
 
  Beth looks at the report and remarks, I'm glad to see all my hard work is paying off with Martha Leone's. Sales have gone up 10 over the previous quarter
   Jason replies, Increased sales are great, but I'm worried about Martha Leone's margin, Beth. We were showing a profit with Martha Leone's at the lower sales level, but now we're showing a loss. Gross margin percentage this quarter was 40, down five percentage points from the prior quarter. I'm afraid that corporate will push hard to drop them as a customer if things don't turn around.
   That's crazy, Beth responds. A lot of that overhead for things like order processing, deliveries, and sales calls would just be allocated to other customers if we dropped Martha Leone's. This report makes it look like we're losing money on Martha Leone's when we're not. In any case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Martha Leone's is a very good customer.
 
  Required:
  1. Assume that Beth is partly correct in her assessment of the report. Upon further investigation, it is determined that 10 of the order processing costs and 20 of the delivery costs would not be avoidable if CRS were to drop Martha Leone's. Would CRS benefit from dropping Martha Leone's? Show your calculations.
  2. Beth's bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Beth have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this?
  3. Should Jason rework the numbers? How should he respond to Beth's comments about making Martha Leone's look more profitable?

Question 2

The accountant recorded accounts payable as 45,000 when it should have been recorded as 4,500 . This is an example of a ________________.
 a. matching error
  b. footing
  c. slide
  d. transposition

[AmberC1996]

Answer to Question 1

1. CRS would not benefit from dropping Martha Leone's because it would lose 21,840 in revenues and save 21,672 in costs resulting in a 168 decrease in operating income.

Difference:
Incremental
(Loss in Revenues)
and Savings in Costs from
Dropping Martha Leone's
Revenues
Cost of goods sold
Order processing (7,000  10  7,000)
Delivery (1,750  20  1,750)
Rush orders
Sales calls
Total costs
Effect on operating income (loss) (21,840)
13,090
6,300
1,400
462
420
21,672
 (168)

2. The drop in gross margin percentage indicates that Beth may be giving Martha Leone's excessive discounts, perhaps in excess of company guidelines. If CRS awards bonuses based on sales rather than some measure of operating income, it may encourage sales representatives to lower margins in order to increase sales. CRS may want to consider basing bonuses on customer margin. The company may also want to enforce more stringent discounting guidelines.

3. Jason could suggest that Beth approach Martha Leone's about reducing the number of different orders that they place. If the orders could be placed less frequently, the company could reduce both order processing and delivery costs. Beth could also investigate the causes of the rush orders to see if they could be avoided.

Jason should not rework the numbers. Referring to Standards of Ethical Conduct for Management Accountants, in Exhibit 1- 7, Jason Ackerman should consider the request of Beth Donaldson to be unethical for the following reasons.

Competence
 Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. Adjusting cost numbers violates the competence standard.

Integrity
 Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives. Jason has the responsibility to act in the best interests of CRS.

 Communicate unfavorable as well as favorable information and professional judgments or opinions. Jason needs to communicate the proper and accurate results of the analysis, regardless of whether or not it pleases Beth Donaldson.

 Refrain from engaging in or supporting any activity that would discredit the profession. Falsifying the analysis would discredit Jason and the profession.

Credibility
 Communicate information fairly and objectively. Jason needs to perform an objective analysis of Martha Leone's profitability and communicate the results fairly.

 Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented. Jason needs to fully present an accurate analysis.

Confidentiality
 Not affected by this decision.

Jason should indicate to Beth that the costs he has derived are correct. If Beth still insists on making the changes to lower the costs to serve Martha Leone's Pizza, Jason should raise the matter with Beth's superior, after informing Beth of his plans. If, after taking all these steps, there is a continued pressure to understate costs, Jason should consider resigning from the company rather than engage in unethical conduct.

Answer to Question 2

C

[humphriesbr@me.com]

TYSM

[gcook]

Excellent