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In: Accounting

External Linkages, Customer Costing, Customer Profitability Emery Company sells small machine parts to heavy equipment manufacturers...

External Linkages, Customer Costing, Customer Profitability

Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $1.70 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 31,000             3,100            
Average order size 3,100             31,000            
Number of setups 36,250             5,250            
Scheduling hours 46,750             5,250            
Inspections 36,250             5,250            
Average unit cost* $0.92             $0.92            

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

Customer-related activity costs:
Processing sales orders $2,387,000
Scheduling production 1,092,000
Setting up equipment 3,486,000
Inspecting batches 4,648,000
   Total $11,613,000

Required:

1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type.

Sales revenue
Customer-related activity costs

___________________________

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.)
_________________

2. Assign the customer-related activity costs to each customer type using activity rates. Enter the appropriate activity rates below.

Processing sales orders _________ per order
Scheduling production _________ per scheduling hour
Setting up equipment _________ per setup
Inspecting batches _________ per inspection

Calculate the profitability of each customer category.

Customer Profitability
Frequent ________________________
Infrequent ________________________

Solutions

Expert Solution

Particulars Frequently Visit Non Frequently Visit Total
Sales Revenue 163,370,000 163,370,000 326,740,000
Less: Total Costs other than Customer Related Cost (88,412,000) (88,412,000) (176,824,000)
Less: Customer Related Cost (5,806,500) (5,806,500) (11,613,000)
Net Operating Income / (Loss) 69,151,500 69,151,500 138,303,000

Notes

Particulars Frequent Non Frequent Total
Sales Order 31,000 3,100
* Average Sales Order Size 3,100 31,000
Total Sales in Units 9,61,00,000 9,61,00,000
* Sales Price per Unit 1.70 1.70
Budgeted Sales 163,370,000 163,370,000 326,740,000
Revenue

Total Customer Related Activity Cost = 11,613,000

Customer Related Cost for Frequently Visit Customer = Sales Revenue for Frequently Visit Customer / Total Sales Revenue * Customer Related Activity Cost

= 163,370,000 / 326,740,000 * 11,613,000

= $ 5,806,500

Customer Related Cost for Non Frequently Visit Customer = Sales Revenue for Non Frequently Visit Customer / Total Sales Revenue * Customer Related Activity Cost

= 163,370,000 / 326,740,000 * 11,613,000

= $ 5,806,500

Particulars Frequently Visit Non Frequently Visit Total
Sales in Units 9,61,00,000 9,61,00,00
* Average Cost per Unit 0.92 0.92
Total Costs other than Customer Related Cost 88,412,000 88,412,000 176,824,000

Question 2

Using Activity Based Costing

Particulars Frequently Visit Non Frequently Visit Total
Sales Revenue 163,370,000 163,370,000 326,740,000
Less: Total Costs other than Customer Related Cost (88,412,000) (88,412,000) (176,824,000)
Less: Customer Related Cost (10,317,903) (1,295,097) (11,613,000)
Net Operating Income / (Loss) 64,640,097 73,662,903 138,303,000


Supporting Work

A B C=A/B
Particulars Activity Cost Total Cost Driver Activity Allocation Rate
Processing Sales Order 2,387,000 34,100 70 Per Sales Order
Scheduling Production 1,092,000 41,500 26.31 Per Scheduling Hour
Setting up Equipment 3,486,000 52,000 67.04 Per Setup
Inspecting Batches 4,648,000 41,500 112 Per Inspection
Total 11,613,000
A B C = A*B D E = A*D
Particulars Activity Allocation Rate Activity for Frequently Total Overhead for Frequently Visit Activity for Non Frequently Total Overhead for Non Frequently
Processing Sales Order 70 31,000 2,170,000 3,100 217,000
Scheduling Production 26.31 36,250 953,855 5,250 138,145
Setting up Equipment 67.04 46,750 3,134,048 5,250 351,952
Inspecting Batches 112 36,250 4,060,000 5,250 588,000
Total 10,317,903 1,295,097

ekkarill92 answered 8 months ago
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