Busn Simulation Case

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JOhnson beverage inc|
Johnson Beverage Inc|
Case Analysis|
|
Holly Redden, Claudia Nunez|
11/7/2012|

An in depth analysis of the current costing methods used by the beverage distribution company, Johnson Beverage Inc.|

Table of Contents:
Executive Summary…………………………………………………………………………………………………………………………………1 Problem Statement………………………………………………………………………………………………………………………………...1 Analysis …………………………………………………………………………………………………………………………………………………..1 Impact Analysis ………….…………………………………………………………………………………………………………………………..2 Criteria for an Effective Solution ………………………………………………………………………………………………………….….3 Evaluation of Alternatives ……………………………………………………………………………………………………………………….3 Recommendation ……………………………………………………………………………………………………………………………………4 Action Plan………………..……………………………………………………………………………………………………………………………5 Appendix…………………………………………………………………………………………………………………………………………………6

Executive Summary:
The problem facing your company is the current method of allocating costs based on revenue is not accurately reflecting customer profitability. If you don’t address this problem in a timely matter you are going to lose your most profitable customers while retaining customers who are in fact costing you money. This will ultimately result in bankruptcy or insolvency, meaning the end of Johnson Beverage Inc. I recommend that you adopt an Activity Based Costing method, establish multiple cost pools and their individual cost drivers and allocate customer service costs based on that method. This will more accurately predict profitability and future customer potential allowing your company to offer competitive pricing and retain long-term customers. Problem Statement:

The problem is the current cost allocation method does not accurately reflect profitability. Analysis:
Johnson Beverage Inc’s revenues for the past year totalled 12 million dollars, with a customer base of approximately 20. Previous ability to retain Saver Superstore, one of the largest and most loyal customers, stemmed from offering a lower discount. According to current costing method Saver Superstore has the lowest profit margin because costs are allocated based on revenue. Managers identify Saver Superstore is a good customer because, they place regular orders, never rush and are very close for delivery. Other customers make rush orders often, take up lots of warehouse labour hours and delivery hours. Because Saver Superstore is one of the largest customers and bring in the largest amount of revenue, they are also allocated the largest portion of costs, skewing the true profitability, when in actuality they use very little in costs per order compared to several other customers. When comparing the original method of cost allocation to an activity based costing method you will find that, the original method of allocating customer service costs based on revenues has grossly understated the profitability of Saver Superstore by 3.475%, and Downtown Retail by 0.471%. It also overstated the profitability of Oscar’s Oddlots by 0.506% and most shocking of all immensely overstated the profitability of Midwellen Supermarket by 9.096%. This data, which can be found in the appendix, shows that allocating customer service costs based on revenues yields inaccurate results. Saver Superstore and Downtown Retail use the smallest amount of costs, by making the least amount of expedited deliveries, requiring the least amount of sales visits and utilizing the least amount of delivery time. Midwellen Supermarket costs your company more in delivery costs than their gross margin alone, not even factoring in the thousands of dollars they are costing you in sales visits, product handling and taking orders. The current costing method that is being used indicates that there is a profit made from Midwellen, when in actuality they run a loss of 12.896%. Impact Analysis:

If cost allocation methods remain the same Johnson Beverage Inc will lose their largest and most loyal customer Saver...
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