Calculate the profitability of each customer type

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Reference no: EM13553750

EXTERNAL LINKAGES, CUSTOMER COSTING, CUSTOMER PROFITABILITY

Dino Company sells machine parts to industrial equipment manufacturers for an average price of $0.75 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. Dino 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. Dino'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

10,000

1,000

Average order size

1,000

10,000

Number of setups

12,500

2,500

Scheduling hours

17,500

2,500

Inspections

12,500

2,500

Average unit cost*

$0.40

$0.40

Customer-related activity costs:

 

Processing sales orders

$1,100,000

Scheduling production

600,000

Setting up equipment

1,800,000

Inspecting batches

2,400,000

Total

$5,900,000

Required:

1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Calculate the profitability of each customer type. Discuss the problems with this measure of customer profitability.

2. Assign the customer-related activity costs to each customer type using activity rates. Now calculate the profitability of each customer category. As a manager, how would you use this information?

Reference no: EM13553750

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