Lowry Locomotive’s Memphis facility has three distribution channels, which are Internet sales, distributors, and catalog sales. Sales through the Internet are at full retail price, but comprise only a small proportion of total sales. Distributors buy in large quantities, but also receive a 35% discount from the retail price. The catalog sales are at full retail price and have large sales volume, but the cost of creating and mailing the catalogs has increased recently. The marketing manager commissions an ABC study to examine the full cost of each channel. The results are shown in the following table:
|
Revenue |
Variable Costs |
Contribution Margin |
Overhead Allocation |
Net Profit |
|
|
Catalog |
$1,500,000 |
$900,000 |
$600,000 |
$575,000 |
$25,000 |
|
Distributors |
3,250,000 |
2,600,000 |
650,000 |
365,000 |
285,000 |
|
Internet |
250,000 |
150,000 |
100,000 |
60,000 |
40,000 |
|
Totals |
$5,000,000 |
$3,475,000 |
$1,350,000 |
$1,000,000 |
$350,000 |
The analysis reveals that the overhead allocated to the catalog channel is so large that its net profitability has declined to near zero. In fact, the Internet channel absorbs so much less overhead that it now generates more profit than the catalog channel, despite having six times less revenue.