Activity-Based Costing Case Study: Greetings Inc.

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Greetings Inc. : Activity-Based Costing
Developed by Thomas L. Zeller Loyola University Chicago, and Paul D. Kimmel,
Univ ers ity of Wis consin-Milw aukee

THE BUSINESS SITUATION
Mr. Burns, president of Greetings Inc., created the Wall Décor unit of Greetings three years ago to increase the company's revenue and profits. Unfortunately, even though Wall Décor's revenues have grown quickly, Greetings appears to be losing money on Wall Décor. Mr. Burns has hired you to provide consuìting services to Wall Décor's management. Your assignment is to make Wall Décor a profitable business unit,
Your first step is to talk with the Wall Décor work force. From your conversations with store managers you learn that the individual Greetings stores are very happy with the Wall Décor arrangement. The stores are generating additional sales revenue from the sale of unframed and framed prints, They are especially enthusiastic about this revenue source because the online nature of the product enables them to generate revenue without the additional cost of carrying inventory. Wall Décor sells unframed and framed prints to each store at product cost plus 2oo/o. Ã 20o/o rnarkup on products is a standard policy of all
Greetings intercompany transactions. Each store is allowed to add an additional markup to the unframed and framed print items according to market pressures.
That is, the selling price charged by each store for unframed and framed prints is determined by each store manager. This policy ensures competitive pricing in the respective store locations, an important business issue because of the intense mall competition.
While the store managers are generally happy with the Wall Décor products, they have noted a significant difference in the sales performance of the unframed prints and the framed prints. They find it difficult to sell unframed prints at a competitive price. The price competition in the malls is very intense. On average, stores find that the profits on

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