Johnson Beverage Inc. (JBI)

1. Please describe the problem faced by JBI and how their accounting data influenced Jack Johnson's initial reaction to the problem

2. In Exhibit 1 of the case, Jim Thomas prepared an analysis depicting his view of customer profitability. Do you think his analysis is helpful? Why or why not?

3. Please prepare your own analysis showing the profitability of JBI's four key customers using the Activity Based Costing approach that we discussed in class and as presented in chapter 7 of our text

4. Based on the analysis you created, what would you recommend that JBI do in response to potential price reductions requested by Saver Superstore and Oscar's OddLots?Whatspecific recommendations would you make to change the structure of the pricing model used by JBI in order to influence customer behavior and/or improve profitability?

(PLEASE MAKE AT LEAST 3 RECOMMENDATIONS AS TO HOW JBI CAN IMPROVE ITS PRICING MODEL FOR ALL CUSTOMERS)

You may perform your calculations on a spreadsheet or on paper - it's your choice. Whichever you choose, please make sure you show your work so that you have the opportunity to earn partial credit where applicable.

Here is how I would suggest you approach Question #3 of the case:

a. First, it might be helpful if you re-read slides #9 - #36 of the Chapter 7 Power Point slide deck posted on BlackBoard. Those slides provide a similar analysis for Baxter Battery and walk through a 5-step process. The first two steps have already been done in the JBI case so you can skip those. (Step #1 of the PP slides result in the data in Table #2 of JBI and Step #2 of the PP slides results in the data in Table #1 of JBI).

b. Step #3 of the PP slides illustrates how to calculate Activity Rates for each Activity Cost Pool. There are 5 activity cost pools in JBI as listed in Table #1. For example, the activity rate for the first pool ("Product Handling") is calculated as follows:

= Cost of Product Handling (Table #1) divided by Number of Cases Sold company-wide by JBI (The Cost Driver is identified in Table 2 and the corresponding data is in Exhibit #2)

= $672,000/800,000 cases = $0.84 per case

Do a similar calculation for the other four Activity Cost Pools. For "Delivering the Product", keep in mind that the "number of miles traveled" for the company is the total deliveries (4,480) multiplied by the average miles per trip (10).

c. Step #4 of the PP Slides is Assigning Overhead to Products or Customers - see slides #28 and #29 for the latter. You need to assign the cost of the 5 Activity Pools to each customer using the rates you calculate in "b" above. For example, the cost of the first pool ("Product Handling") is assigned as follows:

= Quantity of Cost Driver associated with each customer x Activity Rate for that Pool.
= 80,000 cases sold to Saver Superstore x $0.84 per case
= $67,200

So, $67,200 is the cost of Product Handling that we are assigning to Saver Superstore based on the level of activity JBI spends on this particular customer. You will then do additional calculations for each of the other three customers.

You need to assign each of the five Activity Pool costs to each of the four customers so there are a total of 20 separate calculations. You may find it easier to do this on a spreadsheet but some studentsprefer to do the calculations by hand.

d. The fifth and final step of the calculations is shown on slides #35 - #36. Here you will be taking the data already given in the first three lines of Exhibit #1 (Revenues, Cost of Goods and Gross Margin) and then deduct the customer service costs as you assigned them in "c" above using the ABC method. (The customer service costs as assigned in Exhibit #1 of the case were done in a simplified fashion by Jim Thomas at JBI - we are looking for a better method)