Using activity-based costing, compute the charges per unit of service activities. Using activity-based costing, compute the total distribution costs for each of the customers. Is the City of Albion a more profitable customer? Is Omega International a better customer for Boston Depot?
Customer Profitability Analysis: Boston Depot sells office supplies to area corporations and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a "commodity" business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root cause of declining profits, he decided to analyze the profitability of two of the firm's major customers: Omega International (OI) and City of Albion (CA).According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated here:
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Customer Profitability Analysis |
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|
Omega International |
City of Albion |
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|
Sales |
$ |
80,000 |
|
$ |
80,000 |
|
|
Product cost |
|
(50,000 |
) |
|
(48,000 |
) |
|
Service fees (17.5% of sales) |
|
(14,000 |
) |
|
(14,000 |
) |
|
Gross margin |
$ |
16,000 |
|
$ |
18,000 |
|
|
Gross margin percent |
|
20 |
% |
|
22.5 |
% |
|
|
Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as handling customers' requests, pick-packing, order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operation Manager, Jamie Steel, points out that CA has been a much heavier service user than OI. She shows the following data to support her belief:
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Distribution Services Activities for OI and CA |
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OI |
CA |
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|
Number of requisitions |
|
300 |
|
|
700 |
|
|
Requisition line (all pick-packing) |
|
900 |
|
|
2,100 |
|
|
Average number of cartons in warehouse |
|
50 |
|
|
500 |
|
|
Number of miles per delivery |
|
5 |
|
|
6 |
|
|
|
Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:
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Total Estimated |
Estimated Annual |
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|
Activity |
Annual Expense |
Cost Driver |
Activity Level |
|
Requisitions handling |
$3,000,000 |
Requisitions |
300,000 |
|
Warehouse |
1,050,000 |
Number of cartons |
70,000 |
|
Pick-packing |
900,000 |
Pick-pack lines |
600,000 |
|
Data entry |
600,000 |
Pick-pack lines |
600,000 |
|
Delivery charge |
$10 per requisition (delivery) plus $0.30 per mile |
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|
|
Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the same.Required:
- Using activity-based costing, compute the charges per unit of service activities.
- Using activity-based costing, compute the total distribution costs for each of the customers.
- Is the City of Albion a more profitable customer?
- Is Omega International a better customer for Boston Depot?
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