Question

Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $4.70 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 Less Frequently Customers Ordering Customers Sales orders 31,000 3,100 Average order size 3,100 31,000 Number of setups 36,250 5,250 Scheduling hours 46,750 5,250 Inspections 36,250 5,250 Average unit cost" $2.6 $2.6 This cost does not include the cost of the following "customer-related activites: Customer-related activity costs: Processing sales orders $2,387,000 Scheduling production 1,092,000 Setting up equipment 3,486,000 Inspecting batches 4,648,000 Total $11,613,000 Required: 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 Customer-related activity costs Calculate the profitability of each customer type. (Because sales revenues for each customer type are equal, the profitability will be the same for each customer type.) $ 2. Assign the customer-related activity costs to each customer type using activity rates. Enter the appropriate activity rates below. Processing sales orders $ per order Scheduling production si per scheduling hour Setting up equipment $ per setup Inspecting batches s per inspection Calculate the profitability of each customer category Customer Profitability Frequent $ Infrequent $

Answer 1

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