Question

Market Makers Inc. (MMI) provides a range of services to its retail clients—customer service for inquiries, order taking, credit checking for new customers, and a variety of related services. Auto Supermarket (AS) is a large auto dealer that provides financing for the autos and trucks that it sells. AS has approached MMI to manage the inquiries that come in regarding these loans. AS is not satisfied with the performance of the call center it currently uses for handling inquiries on these loans and is considering a change to MMI. MMI has been asked to estimate the cost of providing the service for the coming year.

There are two types of loans at AS, one for autos and SUVs and another for light trucks. The loans for auto and truck buyers typically have different types of customers and loan terms, so the nature and volume of the inquiries are expected to differ. MMI would use its own call center to handle the AS engagement. The MMI call center’s annual costs are as follows:

Call center costs
Salaries	$	4,233,555
Utilities		2,497,446
Leasing of facilities		1,995,513
Other expenses		820,036
	$	9,546,550

MMI’s call center is staffed 12 hours per day with 60 call staff always available. Each staff member has a paid 10-minute break for each hour worked, and an unpaid 1-hour break for a lunch/dinner during each 12-hour shift. Thus, the call center has 12,045,000 minutes (11 hr × 50 min × 60 staff × 365 days) available for calls during the year.

AS and MMI work together to estimate the number of calls and time required for each call, based on AS’s prior experience with its current call center.

Inquiries	Total Calls Answered				Average Number of Minutes/Call				Total Time (minutes)
Inquire re: rates and terms
Autos		80,100				6				480,600
Trucks		32,100				7				224,700
Inquire re: loan application status
Autos		45,100				5				225,500
Trucks		6,760				11				74,360
Inquire re: payment status
Autos		39,100				3				117,300
Trucks		12,100				4				48,400
Inquire re: other matters
Autos		29,100				11				320,100
Trucks		8,510				15				127,650
										1,618,610

Required:

1. Determine the amount that MMI should propose to charge AS for the coming year using TDABC, assuming MMI desires a profit of 30% of incurred cost.

2. Suppose that AS wants the proposal broken down by type of loan (auto, truck). What would the proposal look like now?

Answer 1

					Amount in $
1	Determining total amount MMI should charge using Time Driven Activity based costing
	Total cost incurred by MMI				9546550
	Total Minutes available				12045000
	Total Minutes allocated to AS				1618610
	Cost per Minute				0.792574
	Add :- 30% to cost per minute				0.237772
	Revenue Per Minute				1.030346
	TOTAL REVENUE TO BE BILLED BY MMI				1667728
2	where the proposal is broken down by type of loan (Auto, Truck) the loan would be based on minutes available and on time required for each activity.