Super Bookstore (SB) is a large city bookstore that sellsbooks and music CDs, and has a café. SB operates at capacityand allocates selling, general and administration (S, G & A)costs to each product line using the cost of merchandise of eachproduct line. SB wants to optimize the pricing and cost managementof each product line. SB is wondering if its accounting system isproviding it with the best information for making suchdecisions.

Super Bookstore

Product Line Information

For the Year Ended December 31,2010

Books CDs Café

Revenues $3,720,480 $2,315,360 $736,216

Cost ofMerchandise $2,656,727 $1,722,311 $556,685

Cost of CaféCleaning — — $ 18,250

Number of Purchase ordersPlaced 2,800 2,500 2,000

Number of Deliveries Received 1,400 1,700 1,600

Hours of Shelf Stocking Time 15,000 14,000 10,000

Itemssold 124,016 115,768 368,108

Super Bookstore incurred the following Selling, General& Administration costs:

Super Bookstore

Selling, General & Administrationcosts

For the Year Ended December 31,2010

Purchase DepartmentExpenses $474,500

Receiving DepartmentExpenses 432,400

Shelf Stocking LaborExpense 487,500

Customer Support Expense (cashier and flooremployees) 91,184

$1,485,584

1. Suppose Super bookstore uses cost of merchandise toallocate all S, G & A costs. Prepare product line and totalcompany income statements.

2. Identify an improved method for allocating costs to thethree product lines. Explain. Use the method for allocating S, G& A costs that you propose to prepare new product line andtotal company income statements. Compare your results to theresults in 1.