Big M Superstore is a large discount supermarket. Profits have declined, so the manager has collected data on revenues and costs for different food categories. The following data pertain to some of the frozen foods that Big M Superstore sells. To facilitate comparisons, the manager has listed average price and cost for each category in equivalent square-foot packages:

Ice Cream

Juices

Frozen

Dinners

Frozen

Vegetables

Selling price per unit (square-foot package) (VND’000)

120

130

240

90

Variable costs per unit (square-foot package) (VND’000)

80

100

205

70

Minimum square footage required

24

24

24

24

Maximum square footage allowed

100

100

100

100

The manager wants a maximum of 260 square feet devoted to the four categories in this table.

Required

Given the manager’s constraints, and assuming that the store can sell whatever is displayed on the shelves, what shelf mix (i.e., what number of square feet for each category) will maximize Big M Superstore’s profit from these four categories? [8 marks]

What other factors might the manager consider in deciding on the amount of shelf space per category? [7 marks]

Some people claim that fixed costs are always irrelevant in decision-making. Discuss.

[5 marks]

[TOTAL: 20 MARKS]

TASK 5: Activity Based Costing

At ABI Electronics Ltd, product lines are charged for call center support costs based on sales revenue. Last year’s summary of call center operations revealed the following:

Surveillance Products Specialty Products

Number of calls for information 1,000 4,000

Average call length for information 3 minutes 8 minutes

Number of calls for warranties 300 1,200

Average call length for warranties 7 minutes 15 minutes

Sales revenue $8,000,000 $5,000,000

ABI Electronics Ltd currently allocates call center support costs using a rate of 0.5% of sales revenue.

Required

Compute the amount of call center support costs allocated to each product line under the current system. [2 marks]

Assume ABI Electronics Ltd decides to use the average call length for information to assign last year’s support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not? [3 marks]

Assume ABI Electronics Ltd decides to use the numbers of calls for information and for warranties to assign last year’s support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system. [5 marks]

ABI Electronics Ltd assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information? [5 marks]

Discuss the barriers for implementing ABC for this call center. [5 marks]