Determine profitability of customer class using activity

Reference no: EM13259761

Carbon Company has two classes of customers designated as C Classand D Class. The C Class customers place small, frequentorders, and the D Class customers tend to place larger, lessfrequent orders. Both types of customer are buying the sameproduct. Carbon charges a price equal to manufacturing costplus 25% for a given order. The 25% markup is set large enoughto cover nonmanufacturing costs and provide a reasonable return forCarbon. Both customer types generated the same sales in units,so Carbon's management had assumed that the customer supportcosts were about the same and priced the goods the same for eachcustomer. Carbon recently received some complaints from someof the D Class customers. Several of these customers arethreatening to take their business to other suppliers who allegedlycharge less. For example, one customer said that he could buythe same 5,000 units from a competitor for $3 per unit less thatCarbon's price. This customer wanted a price concession.

Willis Johnson, a recently hired cost accountant, suggested thatthe problem may have to do with unfair cost assignments andsuggested that customer costs be assigned to each customer categoryusing activity-based costing. He collected the followinginformation about customer-related activities and costs for themost recent quarter:

Activity	Activity cost	Cost driver	Level of cost driver
Processing sales orders	$1,760,000	Number of sales orders	440 sales orders
Selling goods	$640,000	Number of sales calls	80 sales calls
Servicing goods	$600,000	Number of service calls	300 service calls

	C Class	D Class
Total units ordered	200,000	200,000
Manufacturing cost per unit	$100	$100
Sales orders	400	40
Sales calls	40	40
Service calls	200	100

Required: Determine the profitability of each customer class using the activity information.

Reference no: EM13259761

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