Question

Activity-based costing, customer profitability Samson Company operates a mail order busi- (L ness and has three major activities: order taking, packaging, and returns. Customers call into the order taking department to place their orders. It takes the order taking st fixed amount of 5 minutes to take each order plus 0.5 minutes for each item in the order. Once the order taking process is complete, the order is sent electronically to the packaging department. It takes the packaging staff a fixed amount of 6 minutes to package each order plus 3 minutes for each item in the order. Because it is a mail order business, Samson allows its customers to return unwanted products. It takes the returns staff a fixed amount of 5 minutes to process each return order plus 2 minutes for each item being returned. The processing times are summarized below. WEEKLY WEEKLY HOURLY SALARY HOURS RATE Order taking staff Packaging staff. Returns staff. $1,184 $ 950 $1,224 37 38 36 $32.00 $25.00 $34.00 Information on two of Samson's customers appears below. CUSTOMER 1 2 Average price of each item ordered Average cost of each item ordered. Number of orders .. Average number of units in each order Number of return requests. Average number of items in each return request. $10 $6 20 10 5 5 $10 $6 10 20 3 4 Required Calculate the profit associated with each of these two customers.

Answer 1

	Customer 1	Customer 2
Ordering minutes per order
For customer 1 ((10*0.5)+5)	10
For customer 2 ((20*0.5)+5)		15
Ordering minutes per order	10	15
Multiply: Number of orders	20	10
Total Ordering minutes	200	150
Total Ordering hours (Above amount / 60)	3.333333	2.500000
Multiply: Hourly rate	$          32.00	$           32.00
Total Ordering costs	$        106.67	$           80.00
	Customer 1	Customer 2
Packaging minutes per order
For customer 1 ((10*3)+6)	36
For customer 2 ((20*3)+6)		66
Packaging minutes per order	36	66
Multiply: Number of orders	20	10
Total packaging minutes	720	660
Total packaging hours (Above amount / 60)	12.0000	11.0000
Multiply: Hourly rate	$          25.00	$           25.00
Total packaging costs	$        300.00	$         275.00
	Customer 1	Customer 2
Return minutes per order
For customer 1 ((5*2)+5)	15
For customer 2 ((4*2)+5)		13
Return minutes per order	15	13
Multiply: Number of items returned	5	3
Total Return minutes	75	39
Total Return hours (Above amount / 60)	1.2500	0.6500
Multiply: Hourly rate	$          34.00	$           34.00
Total Return costs	$          42.50	$           22.10
	Customer 1	Customer 2
Number of orders	20	10
Multiply: Item per order	10	20
Total units sold	200	200
Number of return request	5	3
Multiply: Item per return request	5	4
Total units returned	25	12
Total units sold	200	200
Less: Total units returned	25	12
Net units sold	175	188
Contribution per unit (10-6)	4	4
Total contributed	700	752
Order taking staff	$        106.67	$           80.00
Packaging staff	$        300.00	$         275.00
Return staff	$          42.50	$           22.10
Total costs allocated	$        449.17	$         377.10
Total contributed	$        700.00	$         752.00
Less: Total costs allocated	$        449.17	$         377.10
Profitability associated with two customers	$        250.83	$         374.90