Operating Profit

Pagnol-Carrelages SNC is a small distributor of marble tiles. Pagnol-Carrelages identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and reports the following details for 2007:

Quantity of

Activity cost driver

Cost per unit of cost driver Cost driver
1. Placing and paying for Number of 500 €50 per order
orders of marble tiles orders
2. Receiving and storage Number of 4000 €30 per load
3. Shipping of marble tiles loads moved

Number of

1500 €40 per shipment
to retailers shipments

Pagnol-Carrelages buys 250 000 marble tiles at an average cost of €3 per tile and sells them to retailers at an average price of €4 per tile. Fixed costs are €40 000.

Required

1 Calculate Pagnol-Carrelages’ operating profit for 2007.

Solution

Here to calculate operating profit, we will need overhead charged or applied under ABC method in addition to given sales price andpurchase price.

Overhead charged will be calculated by by multiplying the activity rate to units of activity consumed for three activities as given viz placing and paying for orders of marble tiles, receiving and storage and shipping of marble tiles.

Accordingly:

1.

Operating profit = Units * sales price – Units * Purchase price – Fixed cost – Activity units * Rate

= 250000 * 4 – 250000 * 3 – 40000 – 500 * 50 – 4000 * 30 – 1500 * 40

= 5000

………….

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