Question

Pluto has a customer relations department which deals only with any after-sales advice or problems concerning the above products. At a recent Board meeting, the cost of the customer relations department was a subject for discussion. One director highlighted that the cost of this department had increased over the previous few years and had risen by 10% in the last financial year alone.

Basic salaries in the customer relations department amounted to $3,255,000 and overtime paid in the last financial year was an additional 22% of this amount.

The Financial Director (FD) of Pluto asked, initially, for details of how staff are spending their time in the customer relations department. He then asked that all the costs of the customer relations department for the year be analysed by attributing the costs to the respective products which Pluto sells. He insisted that all costs must be attributed. The time spent by staff in the customer relations department is detailed below:

Customer Relations Department
Customer complaints	32%
Product training	5%
Arranging and processing credit notes to customers	17%
Communication with other departments	10%
Account closures	13%
Customer defaults (non-payment)	7%
Correcting errors in original contract details	16%

Notes

1. 30% of customer complaints relate to mortgage products, 50% relate to loans and 20% relate to credit cards.
2. The staff in the customer relations department only receive training with regard to mortgages.
3. 5,200 credit notes were raised in the last financial year. Credit card customers received 50% of these credit notes with the balance being shared equally between mortgage and loan customers.
4. It has proved impossible for staff in the customer relations department to be specific about the time spent communicating with different departments. This cost should therefore be allocated in equal proportion to each product.
5. Most account closures have been in loans. 70% of staff time has been spent in this area. Time spent on mortgage account closures took up twice as much time as credit card account closures.
6. 80% of the time spent on default payments was spent on loans. 15% of staff time was spent on credit cards. The balance of staff time was spent on mortgages.
7. Three quarters of staff time was spent correcting loan contracts. There were no errors in credit card contracts.

Required:

1. Calculate the total cost of the time the customer relations department spent on each product – mortgage, loan and credit card – for the last financial year.   (14 marks)

2. Advise the Board of Pluto what additional information it would need with regard to the three products to help with their decision making. (6 marks)

Answer 1

Hasic salary Add: Overtime (22%) Total cost 3255000 716100 3921100 Loan 6 ,35,376 Customer Relations Department Customer complaints Product training Arranging and processing credit notes to customers Communication with other departments Account closures Customer defaults non-payment) Correcting errors in original contract details Total Total cost allocation Mortgage 12.70.752 3.81.226 1.99.555 1.98 555 6.75.087 1.68.772 3.97,110 1,32,370 5,16,243 1,03,249 2.77.977 3 .899 6.35.376 1.56.844 39,71,100 11,56,914 Credit Card Basis 2,54,150 % Riven - Training only tomartgage dept 3,37,544 % given 1,32,370 Equally divided 51.624 Time spent 41,695.55 Time spent - Time spent 8,17,385 1,68,772 1,32,370 3,61.370 2.22.382 4.76.532 19,96,801 13% 16% Additional information required for decision making: 1. Revenue earned by three departments 2. Number of customers of each department 3. Revenue per customer of each department