Overview
Cooper Corporation is a meat processing investment in Michigan. The company offers its products to retailers and foodservice merchants. The organization generates profit based on its target market. The industry generates revenue through the retail and foodservice channels of product distribution. To maximize profits, the organization must determine the profitable channel of product distribution. Cooper’s financial sheets show an increase in marketing and logistics cost. The cost of marketing and the product delivery is $40,000,000. The breakdown shows the firm’s personal selling cost is $5,000,000 while sales promotion is $8,000,000.
The cost of packaging and order processing is $10,000,000 and $5,000,000 respectively. Based on the firm’s financial auditing, total sales revenue was $100,000,000. The accountant revealed that operating expenses rose to $55,000,000. The distribution of sales of each the channel of supply can be calculated using ratio percentage. However, the margin of return can be used to calculate the most profitable channel.
The case study shows that total sales = 100,000,000
However, the percentages of sales for both channels of distribution are 60% and 40% respectively.
Retail distribution channel = 60%
Foodservice distribution channel = 40%
Gross margin for retail market = 70%
Gross margin for foodservice = 45%
The cost of purchasing and distribution costs for both supply targets varied significantly.
Cost of purchase (retail) = 70%
Distribution costs (retail) = 80%
Cost of purchase (foodservice) =30%
Distribution costs (foodservice) = 20%
Profitability of Each Channel of Distribution
Retail Market Supply
Using the assumptions above, the percentage of sales (retail) = 70%
Total sales = 100,000,000
Therefore, gross margin = 60,000,000 x (70/100) = 42,000,000
Foodservice Market Supply
Using the assumptions above, the percentage of sales (foodservice) = 45%
Gross margin = 40,000,000 x 0.45 = $180,000,000.
Based on the net expenditures, the sales promotions were reported in retail supply logistics. Sales promotions = $8,000,000.
Personal selling expenses = $8,000,000.
The company employed 50 salespersons for product distribution.
Forty salespersons were employed to handle the retail supply logistics while ten salespersons were assigned to manage the foodservice distribution.
Thus, personal selling expenditures for each channel of distribution (retail) = 40/50 x 8,000,000 = 6,400,000.
Personal selling (foodservice) = 8,000,000 – 6,400,000 = 1,600,000.
For order processing expenditures, the retail distribution channel = 10,000,000 x 0.7 = 7,000,000.
For delivery expenses, the retail distribution channel = 10,000,000 x 0.8 = 8, 000, 000.
Thus, order processing costs for foodservice channel = 3,000,000.
Delivery expenses for foodservice distribution = 2,000,000.
The values are computed from the total expenses of each variable. The cost allocation is a fair assessment of each distribution channel. Therefore, the cost accountant must allocate an individual cost per channel. Based on the traditional cost allocation, the retail distribution channel generated more revenue and also incurred expenses.
Return on Assets for Each Channel of Distribution
The return on assets (ROA) measures cash inflow generated by a firm’s assets. The value describes how efficient managers can maximize profit using their assets.
The ROA = Net income / Average total assets = profit margin x total asset turnover. A higher ROA value means that assets are controlled efficiently to generate income. However, a low ROA will drive away investors because it indicates poor asset management. Total asset for each department can be computed against its net income.
Total asset (retail) machinery = 10,000,000
Account receivable = 3,000,000
Inventory = 4,000,000
Thus, total assets = 10,000,000 + 4,000,000 + 3,000,000 = 17, 000,000
Net income (retail) = 340,000
ROA (retail) = 340,000/17,000,000 x 100 = 2%.
Total asset (foodservice) = 6,000,000 + 1,000,000 = 7,000,000
Net income (foodservice) = 4,660,000
Return on assets (foodservice) = 4,660,000/7,000,000 x 100 = 67%.
The foodservice distribution channel has a higher ROA than the retail chain. As a result, the assets of the foodservice channel are efficiently controlled to maximize profit.
Recommendations
Based on the estimation above, the cost of production of each channel of distribution is lower than the net income. However, it is difficult to determine the most productive chain in output based on its expenditures. The low patronage by foodservice merchants may be influenced by different factors such as poor asset management, poor sales promotions, and weak delivery chain. The cost of sales promotions was incurred in the retail distribution channel. The information shows a different marketing strategy for the supply channels. Auditors of Cooper Corporation should adopt the activity-based costing method. The ABC method encourages effective asset management.
The ABC assists managers assign unmeasured variables in its operating costs and transactions (Huang 2018). Thus, managers can determine cost pools, allocation bases, cost objects, cost control, decision support, and the hierarchy of costs. The approach will support activities that enhance product supply, quality, and performance. Based on limited details on the case study, I will recommend the ABC technique to provide product costing in each channel of distribution, analyze the processes of delivery, evaluate sales performance, and calculate the profitability of each channel of distribution.
Reference List
Huang, Q 2018, ‘Traditional cost system vs. activity-based cost system: a managerial accounting case study’, Applied Finance and Accounting, vol. 4, no. 2, pp. 55-65.