Question

External Linkages, Customer Costing, Customer Profitability

Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $2.80 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):

	Frequently Ordering Customers	Less Frequently Ordering Customers
Sales orders	23,000	2,300
Average order size	2,300	23,000
Number of setups	28,250	5,250
Scheduling hours	38,750	5,250
Inspections	28,250	5,250
Average unit cost*	$1.54	$1.54

*This cost does not include the cost of the following "customer-related" activities:

Customer-related activity costs:
Processing sales orders	$1,518,000
Scheduling production	792,000
Setting up equipment	2,412,000
Inspecting batches	3,216,000
Total	$7,938,000

Calculate the profitability of each customer type. (Because sales revenues for each customer type are equal, the profitability will be the same for each customer type.)

Calculate the profitability of each customer category.

Answer 1

Notes:

1. No. of Units Sold = Sales Orders x Average order Size

2. It is assumed that Both type of Customers exist simlutaneously.