“Reed Park, Inc.” Reed Park Inc is a bottler supplier of bottled spring water to both commercial a

Question: “Reed Park, Inc.”

Reed Park Inc is a bottler supplier of bottled spring water to both commercial and residential customers. Reed parks corporate headquarters is located in Clearwater springs Colorado. It operates distribution centers in three territories throughout the metro Clearwater springs area. The company began by selling to residential areas and small businesses in the region. In recent years its sales have moved toward larger businesses. The metro center was the first DC established the newest center, metro west, was established four years ago and continues to show great growth potential.

Bottling and distribution operations are treated as separate entities and the costs associated with each are easily tracked and charged to the appropriate division. There have been no problems between the two divisions related to the accounting systems. However the managers in the distribution division have recently begun raising some questions regarding the accounting systems in place within their division.

DC operations are relatively straightforward. Bottled water shipments are taken from the main bottling plant and stored at the DCs for delivery to customers at later dates. Most subscribing customers take delivery once every two weeks. Expenses associated with dc operations can be seen in the quarterly income statement. (Table 1) DC overhead includes lease building maintenance security and other costs related to running a warehouse facility Staff and administrative expenses include salaries of sales and support staff as well as the cost of office supplies used in running the office.

Each distribution center has its own sales staff. The corporate office handles the subscription process and provides the drivers delivery employees the information regarding delivery type and schedule. The majority of corporate overhead allocated to distribution centers results from the processing and maintenance of subscriptions and schedules. Reed Park allocates these overhead costs based upon the proportion of the book value of trucks at each DC facility to the total book value of the entire Reed park delivery fleet. This allocation method was implemented at the time the company was founded to relate costs to the most significant cost item. Trucks are requested by distribution centers and purchased by the corporate offices under a corporate fleet contract with a major truck manufacturer. (Table 2) each D is reacted as a profit center and DC management is evaluated based upon its territories net income performance.

The bottled water industry is experiencing strong growth as is Reed Park. While reed parks business seems to be profitable all is not well within the ranks of the organization. Corporate has been pressuring DC to expand their territories and increase delivery volume but DCs have been reluctant to meet this request. Some managers are beginning to question the amount of overhead being charged to them. They complain that increased deliveries will only cause overhead costs to rise. Dc drivers are also unhappy they complain about being overburdened by their ever expanding routes and the pressure to meet difficult delivery schedules. Steve Austin assistant to the controller has been assigned the task of examining the situation and developing alternatives if indeed a solution is needed.

TABLE 1 quarterly income statements for Reed Park’s three distribution centers ($000s)

METRO METRO EAST METRO WEST

REVENUE $865.0 $928.0 $766.4

EXPENSES

Delivery Wages $34.2 $40.0 $33.6

Overtime wages 4.2 3.2 4.4

Staff and admin 150.0 120.0 125.0

DC overhead 75.0 80.0 90.0

Fuel 24.0 28.1 26.0

Truck Maint 105.0 65.0 75.0

Corporate overhd 235.7 (628.1) 283.0 (619.3) 391.3 (745.3)

Net Income $236.9 $308.7 $21.1