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Cost Allocation and Profitability Analysis

XAT 2013 · Decision Making · Hard · Data Interpretation

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Passage / data set

You are running "BIG and Colourful (BnC)" company that sells books to customers through three retail formats: a. You can buy books from bookstores, b. You can buy books from supermarket, c. You can order books over the Internet (Online).

Your manager has an interesting way of classifying expenses: some of the expenses are classified in terms of size: Big, Small and Medium; and others are classified in terms of the colors, Red, Yellow, Green and Violet. The company has a history of categorizing overall costs into initial costs and additional costs. Additional costs are equal to the sum of Big, Small and Medium expenses. There are two types of margins, contribution (sales minus initial costs) and profit (contribution minus additional costs). Given below is the data about sales and costs of BnC:

Overall Costs Table:

  • Sales: 60000
  • Initial Costs: 39000
  • Contribution: 21000
  • Additional Costs: Big (9300), Small (3000), Medium (3500) -> Total Additional: 15800
  • Profit: 5200

Breakdown of additional costs:

ExpensesTotalRedYellowGreenViolet
Big93005100120014001600
Small300004002000600
Medium350040015001400200
Total158005500310048002400

Number of units consumed by each retail format:

Retail FormatRedYellowGreenViolet
Online200525050
Supermarket65202121
Book Store103099
Total2751008080

Question 1 of 4

Read the following statements: Statement I. Online store accounted for 50% of the sales at BnC and the ratio of supermarket sales and book store sales is 1:2. Statement II. Initial Cost is allocated in the ratio of sales. If you want to calculate the profit/loss from the different retail formats, then

  1. A.

    Statement I alone is sufficient to calculate the profit/loss.

  2. B.

    Statement II alone is sufficient to calculate the profit/loss.

  3. C.

    Both statements I and II are required to calculate the profit/loss.

  4. D.

    Either of the two statements is sufficient to calculate the profit/loss.

  5. E.

    Neither Statement I nor Statement II is sufficient to calculate the profit/loss.

Answer

C

Explanation

Statement I gives sales distribution across formats. Statement II gives initial cost distribution. Both statements are required together to compute profit/loss for each channel.

Question 2 of 4

What is the profit/loss from "online" sales? (Use data from previous question if needed)

  1. A.

    0

  2. B.

    -310

  3. C.

    +20

  4. D.

    +388

  5. E.

    Cannot be determined from given information

Answer

D

Explanation

Online Sales = 30000. Initial cost = 50% of 39000 = 19500. Red cost = 5500*(200/275) = 4000. Yellow = 3100*(52/100) = 1612. Green = 4800*(50/80) = 3000. Violet = 2400*(50/80) = 1500. Total Additional = 10112. Profit = 30000 - 19500 - 10112 = +388.

Question 3 of 4

Which retail format is least profit making for BnC?

  1. A.

    Online

  2. B.

    Supermarket

  3. C.

    Book Store

  4. D.

    All formats are loss making.

  5. E.

    All formats are profit making.

Answer

B

Explanation

Calculating profit for Supermarket: Sales = 10000, Initial cost = 6500, Additional cost = 3810. Profit = 10000 - 6500 - 3810 = -310 (Loss). Hence Supermarket is the least profit making.

Question 4 of 4

Which retail format gives the highest profit for BnC?

  1. A.

    Book Store

  2. B.

    Supermarket

  3. C.

    Online

  4. D.

    All are equally profitable.

  5. E.

    Cannot be determined from given information.

Answer

A

Explanation

Book Store: Sales = 20000, Initial cost = 13000, Additional cost = 1940. Profit = 20000 - 13000 - 1940 = +5060. This is higher than Online (+388) and Supermarket (-310).

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