Question

External Linkages, Customer Costing, Customer Profitability 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 plant's manufacturing resources. Emery also inspects a sample of the products each time a batch is produced to ensure that the customer's specifications have been met. Inspection takes essentially the same time regardless of the type of part being produced. Emery's Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year): Frequently Ordering Customers Less Frequently Ordering Customers Sales orders 21,000 2,100 Average order size 21,000 2,100 26,250 5,250 Number of setups Scheduling hours 36,750 5,250 26,250 5,250 Inspections Average unit cost $0.56 $0.56 *This cost does not include the cost of the following "customer-related activites: Customer-related activity costs: Processing sales orders $2,310,000 Scheduling production 1,260,000 Setting up equipment 3,780,000 Inspecting batches 5,040,000 Total $12,390,000

Answer 1

(1) Assign the customer related activity costs to each category of customers in proportion to the sales revenue earned by each customer type Sales Revenue $ 9,26,10,000 Customer Related Activity Costs 1,23,90,000

Frequently ordering customers 1.05 Less Frequently ordering customers 1.05 A 0.56 0.56 Selling price Average cost per unit excluding customer related costs Customer related costs per unit (Total customer cost / No. of units sold) 0.14 0.14 Profitability for each customer type per unit (A-B-C) 0.35 0.35 Profitability for each customer type 1,54,14,000 1,54,14,000 (0.35* 44100000) (0.35*44100000)

Workings : Particulars Total Sale orders Average order size No. of units sold Selling Price per unit Sales Revenue Frequently ordering customers 21,000 2,100 4,41,00,000 1.05 4,63,05,000 Less Frequently ordering customers 2,100 21,000 4,41,00,000 1.05 4,63,05,000 8,82,00,000 9,26,10,000 Total No. of units Selling Price per unit Total Sales Revenue 88200000 1.05 9,26,10,000 $ Customer Related Activity Costs $ 1,23,90,000

2) Assign Customer related activity costs to each customer type using activity rates Processing Sales orders Scheduling production Setting up equipment Inspecting Batches $ 100 per order $ 30 per scheduling production $ 120 per setup $ 160 per inspection Particulars Amount No. of cost drivers Cost drivers (Frequent + Less $ per cost driver frequent) 23,10,000 No. of sales orders 23,100 100 12,60,000 Scheduling hours 42,000 37,80,000 No. of setups 31,500 120 50,40,000 Inspections 31,500 160 Processing Sales orders Scheduling production Setting up equipment Inspecting Batches 30

Calculate profitability of each customer category $ Frequent 1,10,56,500.00 Infrequent 1,97,71,500.00 Sales revenue No.of Units Frequent 4,63,05,000 4,41,00,000 Infrequent 4,63,05,000 4,41,00,000 Average Cost P.U 0.56 0.56 2,46,96,000 2,46,96,000 Total Average cost Customer-related activities Processing Sales orders Scheduling production Setting up equipment Inspecting Batches Total Costs 21,00,000 11,02,500 31,50,000 42,00,000 3,52,48,500 2,10,000 1,57,500 6,30,000 8,40,000 2,65,33,500 Profitability 1,10,56,500 1,97,71,500

100 Total cost No.of cost drivers Processing Sales orders Scheduling production Setting up equipment Inspecting Batches Frequent Infrequent Cost per dirver Amount No.of cost drivers Cost per dirver Amount 21,000 100 21,00,000 2,100 2,10,000 36,750 11,02,500 5,250 30 1,57,500 26,250 120 31,50,000 5,250 120 6,30,000 26,250 160 42,00,000 5,250 160 8,40,000 30 10552500 1837500