Luxury Designer Pvt. Ltd. is a manufacturing company, which manufactures readymade designer shirts. It has four customers: two wholesale category…

CA Intermediate · Cost and Management Accounting · PYQS · May 2024
Luxury Designer Pvt. Ltd. is a manufacturing company, which manufactures readymade designer shirts. It has four customers: two wholesale category customers and two retail category customers. It has developed the following Activity- Based Costing system: Activity Cost Driver Rate (₹) Order Processing 1,260 per purchase order Customer Visits 1,500 per customer visit Regular Delivery 30 per delivery Km. travelled Expedited Delivery 4,490 per expedited delivery List selling price per shirt is 1,000 and average cost per shirt is 600. CEO of Luxury Designer Pvt. Ltd. wants to evaluate the profitability of each of the four customers for the year 2023, to explore opportunities for increasing profitability of his Company in the next year 2024. The following data in context of four customers are available for 2023: Wholesale Customers Retail Customers WC-1 WC-2 RC-1 RC-2 Number of Purchase orders 50 65 224 245 Number of Customer visits 10 13 25 22 Regular Deliveries 46 52 175 198 Kilometers travelled per delivery 20 15 10 25 Expedited Deliveries 5 16 50 62 Average Number of Shirts per Shirt 215 110 18 15 Average Selling Price per Shirt 700 800 900 950 You are required to: Calculate the customer-level operating income and operating income as a % of revenues in 2023 and rank them on the basis of relative profitability.

Suggested Answer and Working Notes:

(a) Working note: Computation of revenues (at listed price), discount, cost of goods sold and customer level operating activities costs: Wholesale Category Customers Retail Category Customers WC-1 WC-2 RC-1 RC-2 Number of shirts sold (a) 10,750 (215x50) 7,150 (110x65) 4,032 (18x224) 3,675 (15x245) Revenues (at listed price) (₹): (b) {(a) × 1,000)} 1,07,50,000 71,50,000 40,32,000 36,75,000 Discount (₹): (c) {(a) × Discount per shirt} 32,25,000 14,30,000 4,03,200 1,83,750 Cost of shirts (₹) : (d) {(a) × 600} 64,50,000 42,90,000 24,19,200 22,05,000 Order taking costs (₹): (No. of purchase × ₹ 1,260) 63,000 81,900 2,82,240 3,08,700 Customer visits costs (₹) (No. of customer visits × 1,500) 15,000 19,500 37,500 33,000 Delivery vehicles travel costs (₹) (Kms travelled by delivery vehicles X 30 per km.) 27,600 23,400 52,500 1,48,500 Cost of expediting deliveries (₹) {No. of expedited deliveries X 4,490} 22,450 71,840 2,24,500 2,78,380 Total cost of customer level operating activities (₹) 1,28,050 1,96,640 5,96,740 7,68,580 Computation of Customer level operating income Wholesale Category Customers Retail Category Customers WC-1 WC-2 RC-1 RC-2 Revenues (At list price) (Refer to working note) 1,07,50,000 71,50,000 40,32,000 36,75,000 Less: Discount (Refer to working note) 32,25,000 14,30,000 4,03,200 1,83,750 Revenue (At actual price) 75,25,000 57,20,000 36,28,800 34,91,250 Less: Cost of shirts (Refer to working note) 64,50,000 42,90,000 24,19,200 22,05,000 Gross margin 10,75,000 14,30,000 12,09,600 12,86,250 Less: Customer level operating activities costs (Refer to working note) 1,28,050 1,96,640 5,96,740 7,68,580 Customer level operating income 9,46,950 12,33,360 6,12,860 5,17,670 Operating income as a % of revenues 12.584% 21.562% 16.889% 14.828% Rank IV I II III

Topics: Activity Based Costing

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