Question

Use the following for parts A & B:

Assume that a cable television company charges its customers a “late fee” of $5 whenever a customer fails to pay his bill within 45 days of the billing date. Further assume that the law allows such a fee as long as the costs incurred by the cable company is approximately what it costs to service the accounts of those late-paying customers. For example, the cable company must contact the late paying customers by mail and by phone. Sometimes agents are sent to customers’ house to seek payment or turn off their cable service. There are numerous other activities that are carried out to deal with late-paying customers. About 5 percent of all customers are charged a late fee in any given month.

A. Based on the information provided above, which of the following accounting concepts would be most useful in evaluating the costs incurred by the cable company in defending itself against a class action suit alleging that the “late fee” is too high?

a. Differential/incremental costs.

b. Allocated costs.

c. The proper treatment of repair and maintenance expenditures.

d. Proper revenue recognition models.

e. All of the items above are equally valuable in this case.

B.If you are an financial expert witness working for the defendant (the cable company)

a. The only costs that will be included in your measurement of cost that the cable company incurs in

connection with servicing late-paying customers will be variable costs.

b. Fixed costs, because of their nature, would not be utilized in your analysis.

c. You would most likely consider all costs that are incremental to the activities associated with servicing

late-paying customers regardless of whether they were fixed or variable.

d. All of the answers above are correct.

e. None of the answers above are correct.

Answer 1

The answer is

A. Differential incremental costs since the customer would like to prove that the actual costs are lower, none of the allocated costs will be taken

The answer is c. All incremental costs whether fixed or variable

Since the company would want to show that the costs are as high as collected