Alter's Home Center (AHC) sells renovation and remodeling products to both contractors and individual home owners. One of the services AHC offers is delivery of the purchased products to the customer's work site. Because not all customers take advantage of the delivery service option, ACH adds 10 percent to the cost of the products purchased to cover the delivery cost. A business intern spent the summer at ACH. The intern's assignment was to analyze the delivery service and recommend a better way to charge customers for using it. The intern, who had studied activity-based costing, identified the following activities and the data related to them: Activity Cost Driver Annual Cost Annual Driver Volume Picking order Number of items $ 353,875 372,500 items Delivering order Number of orders 1,190,000 35,000 orders Handling complaints Number of complaints 40,500 150 complaints Total delivery cost $ 1,584,375 The intern selected two customers, who were frequent customers, to use as an illustration of the system: Wagner Remodeling and Burlington Contractors. The intern collected the following information on these two customers for the most recent six months: Wagner Remodeling Burlington Contractors Total order value (before delivery charge) $ 20,000 $ 28,000 Number of orders 30 72 Total number of items 370 320 Number of delivery complaints 1 7 Required: What would the delivery charge for each customer be under the current policy of 10 percent of order value? What would the activity-based costing system estimate as the cost of delivering to each customer?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Alter's Home Center (AHC) sells renovation and remodeling products to both contractors and individual home owners. One of the services AHC offers is delivery of the purchased products to the customer's work site. Because not all customers take advantage of the delivery service option, ACH adds 10 percent to the cost of the products purchased to cover the delivery cost. A business intern spent the summer at ACH. The intern's assignment was to analyze the delivery service and recommend a better way to charge customers for using it. The intern, who had studied activity-based costing, identified the following activities and the data related to them:

Activity	Cost Driver	Annual Cost	Annual Driver Volume
Picking order	Number of items	$ 353,875	372,500	items
Delivering order	Number of orders	1,190,000	35,000	orders
Handling complaints	Number of complaints	40,500	150	complaints
Total delivery cost		$ 1,584,375

The intern selected two customers, who were frequent customers, to use as an illustration of the system: Wagner Remodeling and Burlington Contractors. The intern collected the following information on these two customers for the most recent six months:

	Wagner Remodeling	Burlington Contractors
Total order value (before delivery charge)	$ 20,000	$ 28,000
Number of orders	30	72
Total number of items	370	320
Number of delivery complaints	1	7

Required:

What would the delivery charge for each customer be under the current policy of 10 percent of order value?
What would the activity-based costing system estimate as the cost of delivering to each customer?

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