Calculate current average cost of processing order, Financial Accounting

Assignment Help:

SF is a division of Sell.com, an internet retailer. SF operates two large server farms, each of which is a set of interconnected computers and hard drives that are used to process sales orders from customers. SF started out with one farm, then added a second farm as the volume of orders rose, and will eventually need to add additional farms over time. SF charges different divisions within the firm for processing sales orders for those divisions. The transfer price is the average actual cost of processing an order plus 10%. Actual costs are a mix of "fixed" costs of $10 million per server farm per year (which include depreciation, utilities, staff, etc.), and "variable" costs of about $0.05 per sales order (which relate mostly to the wages for staff involved in manually correcting about 1% of orders that have problems). The two server farms have a combined capacity to process about 20 million orders, but they are currently running at about 75% of that capacity. All divisions in Sell.com are evaluated based on their operating profits before taxes and capital charges.

(a)    Some of the divisions have begun to complain about the high order processing costs charged by SF, and refer to quotes received from outside vendors to process orders that are much lower. They suspect that part of the problem is that SF has no incentive to control its own costs, since it gets back whatever it spends plus 10%. They have threatened to "go outside" but top management has customer privacy concerns and would prefer to process orders internally, unless the gap between inside and outside costs is too much to ignore. What suggestions do you have for top management in terms of their policy for how much SF should charge other divisions for processing sales orders?

(b)   What is the current average cost of processing an order?

(c)  A more careful evaluation of the costs incurred by SF suggests that orders are in fact generated by three different customer types: a) domestic retail customers, b) overseas retail customers, and c) corporate customers. Each customer type generates about 5 million orders currently. All of the variable costs are generated by overseas retail customers, unfamiliar with some of the data fields they have to fill in when ordering goods, and about 25% of the fixed costs (relating to specialist staff costs) are created by corporate customers who need special attention. These costs are essentially fixed since they require specialists to be available 24x7, regardless of the number of corporate customer orders processed. The remaining fixed costs are common and relate equally to all 3 products. Calculate the actual cost of processing an order for each of the three customer types. Based on the new cost structure revealed, speculate on some of the changes that downstream divisions (those buying services from SF) might undertake to benefit from the results of your analysis.

(d)   While the analysis conducted in part (c) mollified some of the divisions buying services from SF (since the outside quotes they had received related to domestic retail customers), they were still uncomfortable about having to pay for excess capacity. The remaining 75% of total fixed costs were spread over the actual orders processed. More important, they felt that the cost of processing an order declined as excess capacity declined, and then would rise sharply as a new server farm comes on line. What suggestions do you have for ways to deal with this concern?


Related Discussions:- Calculate current average cost of processing order

Lack of assets available to offer as collateral or security, Q. Lack of ass...

Q. Lack of assets available to offer as collateral or security? If SMEs wish to access bank finance for instance, then banks will wish to address the information problem referr

Executorship, EXECUTORSHIP Executorship is the body of statute law, cas...

EXECUTORSHIP Executorship is the body of statute law, case law and practice concerning the management of the estate of a deceased person. In what follows, we shall express the

Condition of joint return, Surviving Spouse - This is a person whose wife o...

Surviving Spouse - This is a person whose wife or husband died during tax year. A surviving spouse can file a JOINT RETURN for the year in which death occurred. Additionally a join

Presentations of financial statements, Presentations of Financial Statement...

Presentations of Financial Statements The objective is to give guidance regarding the preparation of published financial statements and prescribe the content of the published fin

Financial statements, Describe the following questions:- Q.1 Explain how...

Describe the following questions:- Q.1 Explain how financial statements assist in the capital allocation process. How are financial statements limited? Which financial statement

How accounting objectives can be achieved, How Accounting objectives can be...

How Accounting objectives can be achieved There are two main ways by which this can be achieved: All the accounting records are maintained at the head office; or Each

Powers of investment-trust laws and accounts, POWERS OF INVESTMENT The ...

POWERS OF INVESTMENT The trustees have a duty to obtain control of trust assets and to invest trust funds in authorised securities.   The trustees may invest in such securities

Calculate the net present value, You are a Senior Financial Manager in the ...

You are a Senior Financial Manager in the recently privatised Sodor Railway Engineering Corporation Plc (SREC). (a) Subsequent to privatisation the Chief Executive Officer of SR

Payments needed?, Payments needed? Zach Taylor is settling a $27,000 loan d...

Payments needed? Zach Taylor is settling a $27,000 loan due today by making 6 equal annual payments of $6018.83. What payments must Zach Taylor make to settle the loan at the inter

Cash budget, Beginning balance 24,000 cash Sales 250,000 Gross profit 45% o...

Beginning balance 24,000 cash Sales 250,000 Gross profit 45% of sales Accounts receivable increase by 24,000 Accounts payable increased by 51,000 Inventory increased by 98,000 Sell

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd