Johnson Beverage Case Study

Johnson Beverage, Inc.

Executive Summary

Johnson Beverage, Inc. (JBI) has been in the business of supplying sports beverages to about 20 customers over the last 10 to 20 years. Starting as a small specialty store, they were able to allocate their support charges by the revenues that each customer contributed to the company. Unfortunately, their largest customer, Super Saver, is considering changing its beverage source if Johnson Beverage does not reduce its pricing.

Johnson Beverage is now looking into its support allocation and alternative methods to more appropriately allocate this charge to their customers.

Analysis

1.  What causes the two costing method to produce different results?

The original costing method uses net revenue as the basis for allocating customer service costs. The new activity-based method groups customer service activities into five different segments that have their own allocation rates.

1.   Which costing method provides JBI with better information and why?

The activity based cost system provides better information because it uses multiple cause-and-effect relationships to determine the true cost of customer service for each individual customer.

1.  What are the strategic implications of your analysis?

The implications of our analysis show that Saver Superstore has been over-costed and that this customer has a much higher profit margin than JBI had thought. JBI can lower the price without fear of losing money on the sales.

1.  What recommendations do you have for the management of JBI?

We would recommend implementing an activity-based cost system and using that information to determine if there are customers that they should drop or if there are customer service costs that could be improved on.

Conclusion

After considering all options, we believe JBI should implement the activity-based cost system.

This option most appropriately relates the costs of operations to the customers’ use of support applications. Additionally, implementing this system will change the way in which JBI recognizes profits from their customers.  This profit scenario also works in better alignment with the customers’ interactions with JBI.

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