Dropping a customer, activity-based costing, ethics. Justin Anders is the
Sales | $43,680 |
Cost of goods sold (all variable) | 26,180 |
Order processing (50 orders processed at $280 per order) | 14,000 |
Delivery (5,000 miles driven at $0.70 per mile) | 3,500 |
Rush orders (6 rush orders at $154 per rush order) | 924 |
Customer sales visits (6 sales calls at $140 per call) | 840 |
Total costs | 45,444 |
Profits | $(1,764) |
Sara looks at the report and remarks, “I’m glad to see all my hard work is paying off with Donnelly’s. Sales have gone up 10% over the previous quarter!”
Justin replies, ‘Increased sales are great, but I’m worried about Donnelly’s margin, Sara. We were showing a profit with Donnelly’s at the lower sales level, but now we’re showing a loss. Gross margin percentage this quarter was 40%, down five percentage points from the prior quarter I’m afraid that corporate will push hard to drop them as a customer if things don’t turn around.”
“That’s crazy,” Sara responds. “A lot of that overhead for things like order processing, deliveries, and sales calls would just be allocated to other customers if we dropped Donnelly’s. This report makes it look like we’re losing money on Donnelly’s when we’re not. In any case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Donnelly’s is a very good customer.”
- 1. Assume that Sara is partly correct in her assessment of the report. Upon further investigation, it is determined that 10% of the order
processing costs and 20% of the delivery costs would not be avoidable if CRS were to drop Donnelly’s. Would CRS benefit from dropping Donnelly’s? Show your calculations. - 2. Sara’s bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Sara have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this?
- 3. Should Justin rework the numbers? How should he respond to Sara’s comments about making Donnelly’s look more profitable?
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Customers as a Cost Object Morrisom National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows: Additional data concerning the usage of the activities by the various customers are also provided: Required: (Note: Round answers to two decimal places.) 1. Calculate a cost per account per year by dividing the total cost of processing and maintaining checking accounts by the total number of accounts. What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts? 2. Calculate a cost per account by customer category by using activity rates. 3. Currently, the bank offers free checking to all of its customers. The interest revenues average 90 per account; however, the interest revenues earned per account by category are 80, 100, and 165 for the low-, medium-, and high-balance accounts, respectively. Calculate the average profit per account (average revenue minus average cost from Requirement 1). Then calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2. 4. CONCEPTUAL CONNECTION After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50% of the customers would switch banks if a checking fee were imposed. Explain how you could verify the presidents argument by using ABC.arrow_forwardAssign the customer-related activity costs to each customer type using activity rates. Now calculate the profitability of each customer category. As a manager, how would you use this information? Emery Company sells small machine parts to heavy equipment manufacturers for an average price of 1.05 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plants manufacturing resources. Emery also inspects a sample of the products each time a batch is produced to ensure that the customers specifications have been met Inspection takes essentially the same time regardless of the type of part being produced. Emerys Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year): Required: 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Calculate the profitability of each customer type. Discuss the problems with this measure of customer profitability.arrow_forwardNote that Barbaras Bistro in Figure 1-2 prepares monthly performance reports. Do you think that it would be a good idea for Barbara to switch to just an annual performance report in an effort to reduce its accounting costs?arrow_forward
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- The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold. However, Barry White, the firms new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Following are activity and cost information relating to two of Chocolate Bakers major products: Using activity-based costing, which of the following statements is correct? a. The muffins are 2,000 more profitable. b. The cheesecakes are 75 more profitable. c. The muffins are 1,925 more profitable. d. The muffins have a higher profitability as a percentage of sales and, therefore, are more advantageous.arrow_forwardEvaluating selling and administrative cost allocations Gordon Gecco Furniture Company has two major product lines with the following characteristics: Commercial office furniture: Few large orders, little advertising support, shipments in full truckloads, and low handling complexity Home office furniture: Many small orders, large advertising support, shipments in partial truckloads, and high handling complexity The company produced the following profitability report for management: The selling and administrative expenses are allocated to the products on the basis of relative sales dollars. Evaluate the accuracy of this report and recommend an alternative approach.arrow_forwardWest Island distributes a single product. The companys sales and expenses for the month of June are shown. Using the information presented, answer these questions: A. What is the break-even point in units sold and dollar sales? B. What is the total contribution margin at the break-even point? C. If West Island wants to earn a profit of $21,000, how many units would they have to sell? D. Prepare a contribution margin income statement that reflects sales necessary to achieve the target profit.arrow_forward
- Scattergraph, High-Low Method, and Predicting Cost for a Different Time Period from the One Used to Develop a Cost Formula Refer to the information for Farnsworth Company on the previous page. Required: 1. Prepare a scattergraph based on the 10 months of data. Does the relationship appear to be linear? 2. Using the high-low method, prepare a cost formula for the receiving activity. Using this formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? 3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? Use the following information for Problems 3-60 and 3-61: Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controllers department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:arrow_forwardHow might Enviro-Tech use the new cost information from its activity-based costing system to better manage its business?arrow_forwardSara’s bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Sara have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this?arrow_forward
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