Wholesale Customers Retail Customers North America South America Wholesaler Green Energy Global Power Wholesaler Revenues at list prices Discounts from list prices Cost of goods sold Delivery costs Order processing costs $375,000 $590,000 $175,000 $130,000 590 25,800 47,200 8,400 285,000 510,000 144,000 95,000 4,550 6,710 2,230 2,145 3,820 5,980 2,180 1,130 Cost of sales visit 6,300 2,620 2,620 1,575 1. Calculate customer-level operating income using the format in Exhibit 14-3. 2. Prepare a customer-cost hierarchy report, using the format in Exhibit 14-6. 3. Enviro-Tech's management decides to allocate all corporate-sustaining costs to distribution chan- nels: $38 million to the wholesale channel and $10 million to the retail channel. As a result, distribu- tion channel costs are now $71 million ($33 million + $38 million) for the wholesale channel and $22 million ($12 million + $10 million) for the retail channel. Calculate the distribution-channel-level operating income. On the basis of these calculations, what actions, if any, should Enviro-Tech's manag- ers take? Explain. 4. How might Enviro-Tech use the new cost information from its activity-based costing system to better manage its business? Required
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Customer profitability, customer-cost hierarchy. Enviro-Tech has only two retail and two wholesale customers. Information relating to each customer for 2017 follows (in thousands):
Enviro-Tech’s annual distribution-channel costs are $33 million for wholesale customers and $12 million for retail customers. The company’s annual corporate-sustaining costs, such as salary for top management and general-administration costs are $48 million. There is no cause-and-effect or benefits-received relationship between any cost-allocation base and corporate-sustaining costs. That is, Enviro-Tech could save corporate-sustaining costs only if the company completely shuts down.
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