menu
bartleby
search
close search
Hit Return to see all results
close solutoin list

Assign the customer-related activity costs to each customer type using activity rates. Now calculate the profitability of each customer category. As a manager, how would you use this information? Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $1.05 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plant’s manufacturing resources. Emery also inspects a sample of the products each time a batch is produced to ensure that the customer’s specifications have been met Inspection takes essentially the same time regardless of the type of part being produced. Emery’s Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year): Required: 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Calculate the profitability of each customer type. Discuss the problems with this measure of customer profitability.

BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 11, Problem 11E
Textbook Problem
135 views

Assign the customer-related activity costs to each customer type using activity rates. Now calculate the profitability of each customer category. As a manager, how would you use this information?

Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $1.05 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plant’s manufacturing resources. Emery also inspects a sample of the products each time a batch is produced to ensure that the customer’s specifications have been met Inspection takes essentially the same time regardless of the type of part being produced. Emery’s Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year):

Chapter 11, Problem 11E, Assign the customer-related activity costs to each customer type using activity rates. Now calculate

Required:

  1. 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Calculate the profitability of each customer type. Discuss the problems with this measure of customer profitability.

1.

To determine

Compute the profitability of each customer type. Explain the problems with this measure of customer profitability.

Explanation of Solution

Calculate sales revenue for each customer.

Sales Revenue=Average price×Total sales order=$1.05×44,100,000=$46,305,000

Note: The total number of parts is the average order size times the number of sales order.

Therefore, the total customer related activity costs are split equally:

Cost Allocation=Total customer related activity2=12,390,0002=$6,195,000

The profitability of each category is calculated as follows:

ParticularsAmount ($)
Sales revenue46,305,000
Less: Noncustomer-related cost (1)24,696,000
Customer-related activity costs6,195,000
Customer profitability15,414,000

TABLE (1)

Working Note:

(1) Calculate the noncustomer-related cost

2.

To determine

Compute the profitability of each customer category and explain how this information is used as a manager by assigning the customer-related activity costs to each customer type using activity rates.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Show all chapter solutions
add
Ch. 11 - What are the four stages of the consumption life...Ch. 11 - Life-cycle cost reduction is best achieved during...Ch. 11 - What is target costing? What role does it have in...Ch. 11 - Explain why JIT with dedicated cellular...Ch. 11 - Explain how backflush costing works.Ch. 11 - Woodruff Company is currently producing a...Ch. 11 - Ventana Company is a car window repair and...Ch. 11 - Deeds Company sells custom-made machine parts to...Ch. 11 - Kagle design engineers are in the process of...Ch. 11 - Hepworth Company has implemented a JIT system and...Ch. 11 - Keith Golding has decided to purchase a personal...Ch. 11 - San Jose Goodwill Bank has been experiencing...Ch. 11 - Classify the following cost drivers as structural,...Ch. 11 - McConkie Company has decided to pursue a cost...Ch. 11 - Jackson, Inc., manufactures motorcycles. Jackson...Ch. 11 - Assign the customer-related activity costs to each...Ch. 11 - The following series of statements or phrases are...Ch. 11 - Assume that a company has recently switched to JIT...Ch. 11 - Prior to installing a JIT system, Barker Company,...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Potter Company has installed a JIT purchasing and...Ch. 11 - Bunker Company produces two types of glucose...Ch. 11 - Which of the following is a true statement about...Ch. 11 - Which of the following is a true statement about...Ch. 11 - This year, Hassell Company will ship 4,000,000...Ch. 11 - Standard Company has two suppliers: Day and...Ch. 11 - The second stage of customer-based activity-based...Ch. 11 - Evans, Inc., has a unit-based costing system....Ch. 11 - Cortalo, Inc., manufactures riding lawn mowers....Ch. 11 - Moss Manufacturing produces several types of...Ch. 11 - Maxwell Company produces a variety of kitchen...Ch. 11 - Pawnee Works makes machine parts for manufacturers...Ch. 11 - Nico Parts, Inc., produces electronic products...Ch. 11 - Jolene Askew, manager of Feagan Company, has...Ch. 11 - Homer Manufacturing produces different models of...Ch. 11 - Mott Company recently implemented a JIT...Ch. 11 - Southward Company has implemented a JIT flexible...Ch. 11 - Reddy Heaters, Inc., produces insert heaters that...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions add
ADJUSTING COST OF CAPITAL FOR RISK Ziege Systems is considering the following independent projects for the comi...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

List and explain the three kinds of pricing methods.

Foundations of Business (MindTap Course List)