Calculate the cost to service each of the two customers

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Reference no: EM133139979

Question - E-Power Deliveries owns a fleet of electric vehicles that it uses to make deliveries and pickups for customers in the city of Kitchener, Ontario. The company limits its services to overnight deliveries within the surrounding Waterloo region. The company president, Andre Kuvinder, is concerned because of a recent negative trend in net income despite a growing number of customers. In an effort to resolve this situation, he is looking for accounting assistance to better understand operational costs.

Andre has hired a recently designated CPA to help him solve the dilemma. The CPA has decided to implement an activity-based costing system designed to provide relevant information to assist with decision making. The ABC system she designed has four activity cost pools: Travel (from customer to package recipient), Pickup and Delivery, Customer Service, and Other. The activity measures are kilometres for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool (includes repeat deliveries if required), and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure.

The following actual costs will be assigned using the activity-based costing system:

Driver wages

$245,000

Vehicle operating expense

12,800

Vehicle depreciation

70,000

Dispatch personnel salaries

80,000

Office expenses

28,000

Administrative expenses

69,000

Total

$504,800

The distribution of resource consumption across the activity cost pools is as follows:

 

Activity Cost Pools


 

Travel

Pickup and Delivery

Customer Service

Other

Total

Distribution:






Driver wages

85%

10%

5%

0%

100%

Vehicle operating expense

80%

20%

0%

0%

100%

Vehicle depreciation

80%

20%

0%

0%

100%

Dispatch personnel salaries

0%

0%

95%

5%

100%

Office expenses

0%

10%

65%

25%

100%

Administrative expenses

0%

15%

75%

10%

100%

The activity measures and activity levels are presented below:

Activity Cost Pool:

Activity Measure

Expected Activity

Travel

Kilometres

64,600

Pickup and Delivery

Pickup/Delivery Trips

2,750

Customer Service

Number of customers

82

Other

No activity measure

To get started Andre has asked that just two customers be reviewed before applying the analysis to the rest of the company's customer list. The actual activity for the two customers was determined to be:

Activity data for the following two customers:

Mar Supply Co.

Hep Homes Inc.

Kilometres travelled for pickup/deliveries

185

392

Number of Pickup/Delivery trips

8

22

To date, E-Power Deliveries has charged a fixed annual fee for each customer if the customer agreed to give the company all of its overnight delivery business. The annual fee charged to each customer is $3,800.

Required -

1. Allocate the actual spending from the traditional general ledger accounts to the cost pools set up by the CPA.

2. Use the activity measures and actual activity to calculate activity rates.

3. Calculate the cost to service each of the two customers highlighted by the company president.

4. Is the company's practice of charging a flat fee per customer likely to be contributing to the declining profit? Explain.

Reference no: EM133139979

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