Customer Profitability Analysis Garner Industries manufactures precision tools. The firm usesan activity-based costing system. CEO Deb Garner is very proud of the accuracy of the system indetermining product costs. She noticed that since the installment of the ABC system 10 years earlier,the firm had become much more competitive in all aspects of the business and earned an increasingamount of profits every year.In the last two years, the firm sold 1 million units to 4,100 customers each year. The manufacturing cost is $600 per unit. In addition, Garner has determined that the order-filling cost is $100.50per unit. The $784.56 selling price per unit includes 12% markup to cover administrative costs andprofits.The order-filling cost per unit is determined based on the firm’s costs for order-filling activities.Order-filling capacity can be added in blocks of 60 orders. Each block costs $60,000. In addition, thefirm incurs $1,500 order-filling costs per order.Garner serves two types of customers designated as PC (Preferred Customer) and SC (SmallCustomer). Each of the 100 PCs buys, on average, 5,000 units in two orders. The firm also sells500,000 units to 4,000 SCs. On average each SC buys 125 units in 10 orders. Ed Cheap, a buyer forone PC, complains about the high price he is paying. Cheap claims that he has been offered a price of$700 per unit and threatens to take his business elsewhere. Garner does not give in because the $700price Cheap demands is below cost. Besides, she has recently raised the price to SC to $800 per unitand experienced no decline in orders.Required1. Demonstrate how Garner arrives at the $100.50 order-filling cost per unit.2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $700 per unit?3. What is the amount of loss (profit) per unit at the $800 selling price per unit for units sold to SC?
Customer Profitability Analysis Garner Industries manufactures precision tools. The firm uses
an activity-based costing system. CEO Deb Garner is very proud of the accuracy of the system in
determining product costs. She noticed that since the installment of the ABC system 10 years earlier,
the firm had become much more competitive in all aspects of the business and earned an increasing
amount of profits every year.
In the last two years, the firm sold 1 million units to 4,100 customers each year. The
per unit. The $784.56 selling price per unit includes 12% markup to cover administrative costs and
profits.
The order-filling cost per unit is determined based on the firm’s costs for order-filling activities.
Order-filling capacity can be added in blocks of 60 orders. Each block costs $60,000. In addition, the
firm incurs $1,500 order-filling costs per order.
Garner serves two types of customers designated as PC (Preferred Customer) and SC (Small
Customer). Each of the 100 PCs buys, on average, 5,000 units in two orders. The firm also sells
500,000 units to 4,000 SCs. On average each SC buys 125 units in 10 orders. Ed Cheap, a buyer for
one PC, complains about the high price he is paying. Cheap claims that he has been offered a price of
$700 per unit and threatens to take his business elsewhere. Garner does not give in because the $700
price Cheap demands is below cost. Besides, she has recently raised the price to SC to $800 per unit
and experienced no decline in orders.
Required
1. Demonstrate how Garner arrives at the $100.50 order-filling cost per unit.
2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $700 per unit?
3. What is the amount of loss (profit) per unit at the $800 selling price per unit for units sold to SC?
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