ACC – Shocks Inc.

Common costs refer to the cost of resources used by multiple divisions, departments, or another type of grouping. These types of overhead costs are not only incurred within a profit center, but in many other parts of the organization. One example is overhead or common fixed costs for distribution and client support. We’re using the latter for some hands-on experience in allocating common costs and analyzing the implications for Shocks, Inc. Information follows below.Shock, Inc. is a small family company that produces and sells towels. T&M sells the towels to three types of stores: major retailers, specialty retailers and gift shops. The company is doing well and the CEO wants to expand the business. The contribution margin ratio is the highest for the small gift shops, so the CEO feels that those are the type of retail outlets to pursue.Below find Shocks, Inc.s income statement for last year.Shocks Inc.For the year ended 12-3109$600,000.00180,000$420,000.00SalesVariable Product CostsContribution MarginFixed Costs:Production OverheadSelling and DistributionCostsNet Operating Income$120,000.00$240,000.00$360,000.00$60,000.00Customer support & distribution costs are pretty high at Shock, Inc. The total amount was$240,000 last year. The marketing manager has recently been to a seminar and learned aboutapplying ABC to analyze customer and distribution costs. He suggests that the companyanalyze overhead costs associated with supporting different types of customers beforeproceeding with an expansion. The marketing manager knows that the small shops require a lotof attention and is somewhat dubious about the CEO’s proposed strategy. The CEO accepts thesuggestion and you are brought in as a consultant to prepare the analysis. The table belowprovides some information that may be pertinent for the analysis.DepartmentStoresSpecialtyShopsGift ShopsActivity LevelActivityLevelActivityLevelSales (units)10,0005,0005,000Revenues$200,000$100,000$300,000Contribution marginratio50%80%80%No. of customers545250DescriptionCustomer Support &Distribution CostsTotal costs/No. oforders places$40,0001090900Total costs/No. ofsales calls$80,0005195800Total costs/No. ofshipments$120,000204801,000Calculate the customer support and distribution costs associated with the three types of customers. Use a simple strategy first and allocate the costs based on revenues.Recalculate the allocations using activity based costing (ABC) based on the information in the table above.Determine contribution margin less customer support and distribution costs for both approaches above.Which type of customer should the company support and why? Refer to your analysis in your response.What are the characteristics of companies that may benefit from an ABC allocation system?