Cost Accounting A Managerial Emphasis

Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan

Chapter 14

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis - all with Video Answers

Educators

Chapter Questions

Problem 1

"I am going to focus on the customers of my business and leave cost-allocation issues to my accountant" Do you agree with this comment by a division president? Why?

Ameer Said

Ameer Said

Numerade Educator

Problem 2

A given cost may be allocated for one or more purposes. List four purposes.

Ameer Said

Numerade Educator

Problem 3

What criteria might be used to guide cost-allocation decisions? Which are the dominant criteria?

Noor Almesad

Numerade Educator

Problem 4

"A company should not allocate all of its corporate costs to its divisions." Do you agree? Explain.

Paul A.

California State Polytechnic University, Pomona

Problem 5

Once a company allocates corporate costs to divisions, these costs should not be reallocated to the indirect-cost pools of the division." Do you agree? Explain.

Ameer Said

Numerade Educator

Problem 6

Why is customer-profitability analysis a vitally important topic to managers?

Ameer Said

Numerade Educator

Problem 7

How can the extent of price discounting be tracked on a customer-by-customer basis?

Ameer Said

Numerade Educator

Problem 8

"A customer-profitability profile highlights those customers who should be dropped to improve profitability." Do you agree? Explain.

Ameer Said

Numerade Educator

Problem 9

Give examples of three different levels of costs in a customer-cost hierarchy.

Ameer Said

Numerade Educator

Problem 10

What information does the whale curve provide?

Ameer Said

Numerade Educator

Problem 11

Show how managers can gain insight into the causes of a sales-volume variance by subdividing the components of this variance.

Ameer Said

Numerade Educator

Problem 12

How can the concept of a composite unit be used to explain why an unfavorable total sales-mix variance of contribution margin occurs?

Ameer Said

Numerade Educator

Problem 13

Explain why a favorable sales-quantity variance occurs.

Ameer Said

Numerade Educator

Problem 14

How can the sales-quantity variance be decomposed further?

Ameer Said

Numerade Educator

Problem 15

Explain how the direct materials mix and yield variances provide additional information about the direct materials efficiency variance.

Ameer Said

Numerade Educator

Problem 16

Dave Meltzer vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Meltzer's insurance company received a $\$ 4,800$ bill for his two-day stay. One item that caught Meltzer's attention was an $\$ 11.52$ charge for a roll of cotton. Meltzer is a salesman for Johnson \& Johnson and knows that the cost to the hospital of the roll of cotton is in the $\$ 2.20$ to $\$ 3.00$ range. He asked for a breakdown of the $\$ 11.52$ charge. The accounting office of the hospital sent him the following information:
a. Invoiced cost of cotton roll
b. cost of processing of paperwork for purchase
c. Supplies-room management fee
Operating-room and patient-room handling costs
e. Administrative hospital costs
f. University teaching-related costs
g. Malpractice insurance costs
h. cost of treating uninsured patients
i. Profit component Total
$$\begin{array}{r}
\$ 2.40 \\
0.60 \\
0.70 \\
1.60 \\
1.10 \\
0.60 \\
1.20 \\
2.72 \\
0.60 \\
\underline{\$ 11.52} \\
\hline \hline
\end{array}$$
Meltzer believes the overhead charge is obscene. He comments, "There was nothing I could do aboutitit When they come in and dab your stitches, it's not as if you can say, 'Keep your cotton roll. Jbrought my own."
1. Compute the overhead rate Sierra University Hospital charged on the cotton roll
2. What criteria might Sierra use to justify allocation of the overhead items b-i in the preceding list? Examine eachitem separately and use the allocation criterial listed in Exhibit 14-2 (p. 505) in your answer
3. What should Meltzer do about the $\$ 11.52$ charge for the cotton roll?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 17

Greenbold Manufacturing has four divisions named after its
locations: Arizona, Colorado, Delaware, and Florida. Corporate headquarters is in Minnesota. Greenbold corporate headquarters incurs $\$ 5,600,000$ per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:
1. Allocate the indirect headquarters costs of Greenbold Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs.
2. Which allocation base do you think the manager of the Florida division would prefer? Explain.
3. What factors would you consider in deciding which allocation base Greenbold should use?
4. Suppose the Greenbold CEO decides to use direct costs as the allocation base. Should the Florida division be closed? Why or why not?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 18

Rembrandt Hotel \& Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300 -room hotel, a casino, and a restaurant. As Rembrandt's new controller, you are asked to recommend the basis to be used for allocating fixed overhead costs to the three divisions in $2012 .$ You are presented with the following income statement information for 2011 :
You are also given the following data on the three divisions:
$$\begin{array}{lrrr}
& \text { Hotel } & \text { Restaurant } & \text { Casino } \\
\hline \text { Floor space (square feet) } & 80,000 & 16,000 & 64,000 \\
\text { Number of employees } & 200 & 50 & 250
\end{array}$$
You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor space, or the number of employees. Total fixed overhead costs for 2011 was $\$ 14,550,000$
1. Calculate division margins in percentage terms prior to allocating fixed overhead costs.
2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations in dollars and as a percentage of revenues.
3. Discuss the results. How would you decide how to allocate indirect costs to the divisions? Why?
4. Would you recommend closing any of the three divisions (and possibly reallocating resources to other divisions) as a result of your analysis? If so, which division would you close and why?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 19

Lenzig Corporation has three divisions: pulp, paper, and fibers. Lenzig's new controller, Ari Bardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2012 :
Until now, Lenzig Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Bardem asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:
1. Allocate 2012fixed corporate-overhead costs to the three divisions using divisision margin as the allocation base. What is each divisision's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues!?
operating margin percentage under the new allocation scheme?
3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operating margin percentage, which divisision would be most receptive to the new allocation scheme? Which divi sion would be the leastreceptive? Why?
4. Which allocation scheme should Lenzig Corporation use? Why? How might Bardem overcome any objections that may arise from the divisisions?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 20

Orsack Electronics has only two retail and two wholesale customers. Information relating to each customer for 2012 follows (in thousands):
Orsack's annual distribution-channel costs are $\$ 34$ million for wholesale customers and $\$ 5$ million for retail customers. Its annual corporate-sustaining costs, such as salary for top management and generaladministration costs, are $\$ 61$ million. There is no cause-and-effect or benefits-received relationship between any cost-allocation base and corporate-sustaining costs. That is, corporate-sustaining costs could be saved only if 0 rsack Electronics were to completely shut down.
1. Calculate customer-level operating income using the format in Exhibit $14-5$
2. Prepare a customer-cost hierarchy report, using the format in Exhibit $14-6$
3. Orsack's management decides to allocate all corporate-sustaining costs to distribution channels:
$\$ 48$ million to the wholesale channel and $\$ 13$ million to the retail channel. As a result, distribution channel costs are now $\$ 82$ million (\$34 million + \$48 million) for the wholesale channel and $\$ 18$ million (\$5 million + \$13 million) for the retail channel. Calculate the distribution-channel-level operating income. 0 n the basis of these calculations, what actions, if any, should Orsack's managers take? Explain.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 21

Instant Service (IS) repairs printers and photocopiers for five multisite companies in a tristate area. IS's costs consist of the cost of technicians and equipment that are directly traceable to the customer site and a pool of office overhead. Until recently, IS estimated
customer profitability by allocating the office overhead to each customer based on share of revenues. For $2012,$ IS reported the following results:
Tina Sherman, IS's new controller, notes that office overhead is more than $10 \%$ of total costs, so she spends a couple of weeks analyzing the consumption of office overhead resources by customers. She collects the following information:
1. Compute customer-level operating income using the new information that Sherman has gathered.
2. Prepare exhibits for IS similar to Exhibits 14 - 7 and 14 -8. Comment on the results.
3. What options should IS consider, with regard to individual customers, in light of the new data and analysis of office overhead?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 22

Figure Four is a distributor of pharmaceutical products. Its ABC system has five activities:$$\begin{array}{lll}
& \text { Activity Area } & \text { cost Driver Rate in 2012 } \\
\hline \text { 1. } & \text { Order processing } & \$ 40 \text { per order } \\
\text { 2. } & \text { Line-item ordering } & \$ 3 \text { per line item } \\
\text { 3. } & \text { Store deliveries } & \$ 50 \text { per store delivery } \\
\text { 4. } & \text { Carton deliveries } & \$ 1 \text { per carton } \\
\text { 5. } & \text { Shelf-stocking } & \$ 16 \text { per stocking-hour }
\end{array}$$
Rick Flair, the controller of Figure Four, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa single-store distribution market. Two customers are used to exemplify the insights available with the ABC approach. Data pertaining to these two customers in August 2012 are as follows:
1. Use the ABC information to compute the operating income of each customer in August 2012. Comment on the results and what, if anything, Flair should do.
2. Flair ranks the individual customers in the Ma and Pa single-store distribution market on the basis of monthly operating income. The cumulative operating income of the top $20 \%$ of customers is $\$ 55,680 .$ Figure Four reports operating losses of $\$ 21,247$ for the bottom $40 \%$ of its customers. Make four recommendations that you think Figure Four should consider in light of this new customerprofitability information.

Jerelyn Nevil

Numerade Educator

Problem 23

The Detroit Penguins play in the American Ice Hockey League. The Penguins play in the Downtown Arena (owned and managed by the City of Detroit), which has a capacity of 15,000 seats $(5,000 \text { lower-tier seats and } 10,000$ upper-tier seats). The Downtown Arena charges the Penguins a per-ticket charge for use of its facility. All tickets are sold by the Reservation Network, which charges the Penguins a reservation fee per ticket. The Penguins' budgeted contribution margin for each type of ticket in 2012 is computed as follows:
The budgeted and actual average attendance figures per game in the 2012 season are as follows:
There was no difference between the budgeted and actual contribution margin for lower-tier or uppertier seats.
The manager of the Penguins was delighted that actual attendance was $10 \%$ above budgeted attendance per game, especially given the depressed state of the local economy in the past six months.
1. Compute the sales-volume variance for each type of ticket and in total for the Detroit Penguins in 2012 (Calculate all variances in terms of contribution margins.)
2. Compute the sales-quantity and sales-mix variances for each type of ticket and in total in 2012 .
3. Present a summary of the variances in requirements 1 and 2 . Comment on the results.

James Kiss

Numerade Educator

Problem 24

The Jinwa Corporation sells two brands of wine glasses: Plain and Chic. Jinwa provides the following information for sales in the month of June 2011 :
All variances are to be computed in contribution-margin terms.
1. Calculate the sales-quantity variances for each product for June 2011
2. Calculate the individual-product and total sales-mix variances for June 2011 . Calculate the individual product and total sales-volume variances for June 2011
3. Briefly describe the conclusions you can draw from the variances.

Jon Southam

Numerade Educator

Problem 25

Soda-King manufactures and sells three soft drinks: Kola, Limor, and Orlem. Budgeted and actual results for 2011 are as follows:
1. Compute the total sales-volume variance, the total sales-mix variance, and the total sales-quantity variance. (Calculate all variances in terms of contribution margin.) Show results for each product in your computations.
2. What inferences can you draw from the variances computed in requirement 1?

Ahmad Reda

Numerade Educator

Problem 26

Soda-King prepared the budget for 2011 assuming a $12 \%$ market share based on total sales in the western region of the United States. The total soft drinks market was estimated to reach sales of 20 million cartons in the region. However, actual total sales volume in the western region was 27.5 million cartons.
Calculate the market-share and market-size variances for Soda-King in 2011 . (Calculate all variances in terms of contribution margin.) Comment on the results.

Robin Corrigan

Numerade Educator

Problem 27

Dusty Rhodes, controller of Richfield Oil Company, is preparing a presentation to senior executives about the performance of its four divisions. Summary data (dollar amounts in millions) related to the four divisions for the most recent year are as follows:
Under the existing accounting system, costs incurred at corporate headquarters are collected in a single cost pool $(\$ 3,228$ million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division-income bonus pool. Division income is defined as operating income less allocated corporate costs.
Rhodes has analyzed the components of corporate costs and proposes that corporate costs be collected in four cost pools. The components of corporate costs for the most recent year (dollar amounts in millions) and Rhodes' suggested cost pools and allocation bases are as follows:
1. Discuss two reasons why Richfield 0il should allocate corporate costs to each division.
2. Calculate the operating income of each division when all corporate costs are allocated based on revenues of each division.
3. Calculate the operating income of each division when all corporate costs are allocated using the four cost pools.
4. How do you think the new proposal will be received by the division managers? What are the strengths and weaknesses of Rhodes' proposal relative to the existing single-cost-pool method?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 28

Forber Bakery makes baked goods for grocery stores, and has three divisions: bread, cake, and doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are as follows:
The Forber upper management currently allocates this cost to the divisions equally. One of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different indirect costs - number of employees for HR costs, total revenues for accounting department costs, square feet of space for rent and depreciation costs, and equal allocation among the divisions of "other" costs. Information about the three divisions follows:
1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs.
2. Allocate headquarter costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarter costs.
3. Which division manager do you think suggested this new allocation. Explain briefly. Which allocation do you think is "better?"

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 29

Ring Delights is a new company that manufactures custom jewelry. Ring Delights currently has six customers referenced by customer number: $01,02,03,04,05,$ and $06 .$ Besides the costs of making the jewelry, the company has the following activities:
1. Customer orders. The salespeople, designers, and jewelry makers spend time with the customer. The cost driver rate is $\$ 40$ per hour spent with a customer.
2. Customer fittings. Before the jewelry piece is completed the customer may come in to make sure it looks right and fits properly. Cost driver rate is $\$ 25$ per hour.
3. Rush orders. Some customers want their jewelry quickly. The cost driver rate is $\$ 100$ per rush order.
4. Number of customer return visits. Customers may return jewelry up to 30 days after the pickup of the jewelry to have something refitted or repaired at no charge. The cost driver rate is $\$ 30$ per return visit. Information about the six customers follows. Some customers purchased multiple items. The cost of the jewelry is $70 \%$ of the selling price.
1. Calculate the customer-level operating income for each customer. Rank the customers in order of most to least profitable and prepare a customer-profitability analysis, as in Exhibit $14-7$
2. Are any customers unprofitable? What is causing this? What should Ring Delights do with respect to these customers?

Nick Johnson

Numerade Educator

Problem 30

Spring Distribution has decided to analyze the profitability of five new customers (see pp. $510-517$ ). It buys bottled water at $\$ 12$ per case and sells to retail customers at a list price of $\$ 14.40$ per case. Data pertaining to the five customers are as follows:
Its five activities and their cost drivers are as follows:
$$\begin{array}{ll}
\text { Activity } & \text { cost Driver Rate } \\
\hline \text { Order taking } & \$ 100 \text { per purchase order } \\
\text { Customer visits } & \$ 80 \text { per customer visit } \\
\text { Deliveries } & \$ 2 \text { per delivery mile traveled } \\
\text { Product handling } & \$ 0.50 \text { per case sold } \\
\text { Expedited deliveries } & \$ 300 \text { per expedited delivery }
\end{array}$$
1. Compute the customer-level operating income of each of the five retail customers now being examined $(P, Q, R, S, \text { and } T) .$ Comment on the results.
2. What insights are gained by reporting both the list selling price and the actual selling price for each customer?
3. What factors should Spring Distribution consider in deciding whether to drop one or more of the five customers?

Heather Duong

Numerade Educator

Problem 31

Bizzan Manufacturing makes a component called P14-31. This component is manufactured only when ordered by a customer, so Bizzan keeps no inventory of P14-31. The list price is $\$ 100$ per unit, but customers who place "large" orders receive a $10 \%$ discount on price. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of $10 .$ When a customer order is not a multiple of $10,$ Bizzan uses a full case to pack the partial amount left over (e.g., if customer C orders 25 units, three cases will be required). Customers pick up the order so Bizzan incurs costs of holding the product in the warehouse until customer pick up. The customers are manufacturing firms; if the component needs to be exchanged or repaired, customers can come back within 10 days for free exchange or repair.
The full cost of manufacturing a unit of P14-31 is $\$ 80 .$ In addition, Bizzan incurs customer-level costs. Customer-level cost-driver rates are as follows: Information about Bizzan's five biggest customers follows:
The salesperson gave customer $C$ a price discount because, although customer $C$ ordered only 1,300 units in total, 52 orders (one per week) were placed. The salesperson wanted to reward customer $C$ for repeat business. All customers except E ordered units in the same order size. Customer E's order quantity varied, so $\mathrm{E}$ got a discount part of the time but not all the time.
1. Calculate the customer-level operating income for these five customers. Use the format in Exhibit $14-5$ Prepare a customer-profitability analysis by ranking the customers from most to least profitable, as in Exhibit $14-7$
2. Discuss the results of your customer-profitability analysis. Does Bizzan have unprofitable customers? Is there anything Bizzan should do differently with its five customers?

Lindsay Bur

Numerade Educator

Problem 32

Chicago Infonautics, Inc., produces handheld Windows CETM-compatible organizers. Chicago Infonautics markets three different handheld models: PalmPro is a souped-up version for the executive on the go, PalmCE is a consumer oriented version, and PalmKid is a stripped-down version for the young adult market. You are Chicago Infonautics' senior vice president of marketing. The CE0 has discovered that the total contribution margin came in lower than budgeted, and it is your responsibility to explain to him why actual results are different from the budget. Budgeted and actual operating data for the company's third quarter of 2012 are as follows:
1. Compute the actual and budgeted contribution margins in dollars for each product and in total for the third quarter of 2012
2. Calculate the actual and budgeted sales mixes for the three products for the third quarter of 2012 .
3. Calculate total sales-volume, sales-mix, and sales-quantity variances for the third quarter of 2012 . (Calculate all variances in terms of contribution margins.)
4. Given that your CE0 is known to have temper tantrums, you want to be well prepared for this meeting. In order to prepare, write a paragraph or two comparing actual results to budgeted amounts.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 33

Chicago Infonautics' senior vice president of marketing prepared his budget at the beginning of the third quarter assuming a $25 \%$ market share based on total sales. The total handheld-organizer market was estimated by Foolinstead Research to reach sales of 388,000 units worldwide in the third quarter. However, actual sales in the third quarter were 400,000 units.
1. Calculate the market-share and market-size variances for Chicago Infonautics in the third quarter of 2012 (calculate all variances in terms of contribution margins).
2. Explain what happened based on the market-share and market-size variances.
3. Calculate the actual market size, in units, that would have led to no market-size variance (again using budgeted contribution margin per unit). Use this market-size figure to calculate the actual market share that would have led to a zero market-share variance.

Rahul Mahato

Numerade Educator

Problem 34

The Split Banana, Inc., operates a chain of Italian gelato stores. Although the Split Banana charges customers the same price for all flavors, production costs vary, depending on the type of ingredients. Budgeted and actual operating data of its three Washington, DC, stores for August 2011 are as follows:
The Split Banana focuses on contribution margin in its variance analysis
1. Compute the total sales-volume variance for August 2011
2. Compute the total sales-mix variance for August 2011
3. Compute the total sales-quantity variance for August 2011
4. Comment on your results in requirements $1,2,$ and 3

Carson Merrill

Numerade Educator

Problem 35

Nature's Best Nuts produces specialty nut products for the gourmet and natural foods market. Its most popular product is Zesty Zingers, a mixture of roasted nuts that are seasoned with a secret spice mixture, and sold in one-pound tins. The direct materials used in Zesty Zingers are almonds, cashews, pistachios, and seasoning. For each batch of 100 tins, the budgeted quantities and budgeted prices of direct materials are as follows: Changing the standard mix of direct material quantities slightly does not significantly affect the overall end product, particularly for the nuts. In addition, not all nuts added to production end up in the finished product, as some are rejected during inspection.
In the current period, Nature's Best made 2,500 tins of Zesty Zingers in 25 batches with the following actual quantity, cost and mix of inputs:
1. What is the budgeted cost of direct materials for the 2,500 tins?
2. Calculate the total direct materials efficiency variance.
3. Why is the total direct materials price variance zero?
4. Calculate the total direct materials mix and yield variances. What are these variances telling you about the 2,500 tins produced this period? Are the variances large enough to investigate?

Cinsy Krehbiel

Numerade Educator

Problem 36

Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has been making guitars for 20 years and is paid $\$ 30$ per hour. The second worker, Earl, is less experienced, and is paid $\$ 20$ per hour. One guitar requires, on average, 10 hours of labor. The budgeted direct labor quantities and prices for one guitar are as follows:
That is, each guitar is budgeted to require 10 hours of direct labor, comprised of $60 \%$ of George's labor and $40 \%$ of Earl's, although sometimes Earl works more hours on a particular guitar and George less, or vice versa, with no obvious change in the quality or function of the guitar.
During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as follows:
1. What is the budgeted cost of direct labor for 25 guitars?
2. Calculate the total direct labor price and efficiency variances.
3. For the 25 guitars, what is the total actual amount of direct labor used? What is the actual direct labor input mix percentage? What is the budgeted amount of George's and Earl's labor that should have been used for the 25 guitars?
4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the total direct labor efficiency variance? What do these variances tell you?

Natalie Britton

Natalie Britton

Numerade Educator

Problem 37

Sarah Reynolds recently started a job as an administrative assistant in the cost accounting department of Mize Manufacturing. New to the area of cost accounting, Sarah is puzzled by the fact that one of Mize's manufactured products, SR460, seem to have a different cost, depending on who asks for it. When the marketing department requested the cost of SR460 in order to determine pricing for the new catalog, Sarah was told to report one amount, but when a request came in the very next day from the financial reporting department, the cost of SR460, she was told the cost was very different. Sarah runs a report using Mize's cost accounting system, which produces the following cost elements for one unit of SR460:
1. Explain to Sarah why the cost given to the marketing and financial reporting departments would be different.
2. Calculate the cost of one unit of SR460 to determine the following:
a. The selling price of SR460
b. The cost of inventory for financial reporting
c. Whether to continue manufacturing $\mathrm{SR} 460$, or to purchase it from an outside source (Assume that SR460 is used as a component in one of Mize's other products.
d. The ability of Mize's production manager to control costs

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 38

Denise Nelson operates Interiors by Denise, an interior design consulting and window treatment fabrication business. Her business is made up of two different distribution channels, a consulting business in which Denise serves two architecture firms (Attractive Abodes and Better Buildings), and a commercial window treatment business in which Denise designs and constructs window treatments for three commercial clients (Cheery Curtains, Delightful Drapes, and Elegant Extras). Denise would like to evaluate the profitability of her two architecture firm clients and three commercial window treatment clients, as well as evaluate the profitability of each of the two divisions, and the business as a whole. Information about her most recent quarter follow:
Denise gave a $10 \%$ discount to Attractive Abodes in order to lure it away from a competitor, and gave a $5 \%$ discount to Elegant Extras for advance payment in cash.
1. Prepare a customer-cost hierarchy report for Interiors by Denise, using the format in Exhibit $14-6$
2. Prepare a customer-profitability analysis for the five customers, using the format in Exhibit $14-7$.
3. Comment on the results of the preceding reports. What recommendations would you give Denise?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 39

Snark Corporation manufactures a product called the snark, which it sells to merchandising firms such as Snark Republic (SR), Snarks-R-Us (SRU), Neiman Snark-us (NS), Snark Buy (SB), Snark-Mart (SM), and Wal-Snark (WS). The list price of a snark is $\$ 50,$ and the full manufacturing costs are $\$ 35 .$ Salespeople receive a commission on sales, but the commission is based on number of orders taken, not on sales revenue generated or number of units sold. Salespeople receive a commission of $\$ 25$ per order (in addition to regular salary)
Snark Corporation makes products based on anticipated demand. Snark Corporation carries an inventory of snarks so rush orders do not result in any extra manufacturing costs over and above the $\$ 35$ per snark. Snark Corporation ships finished product to the customer at no additional charge to the customer for either regular or expedited delivery. Snark incurs significantly higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to Snark, and these returns are subtracted from gross revenue. The customers are not charged a restocking fee for returns Budgeted (expected) customer-level cost driver rates are as follows:
Because salespeople are paid $\$ 25$ per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order taking cost by $\$ 16$ per smaller order from $\$ 30$ per order to $\$ 14$ per order) because the smaller orders are all written at the same time. This lower cost rate is not included in budgeted rates because salespeople create smaller orders without telling management or the accounting department. All other actual costs are the same as budgeted costs. Information about Snark's clients follows:
1. Classify each of the customer-level operating costs as a customer output-unit-level, customer batchlevel, or customer-sustaining cost.
2. Using the preceding information, calculate the expected customer-level operating income for the six customers of Snark Corporation. Use the number of written orders at $\$ 30$ each to calculate expected order costs.
3. Recalculate the customer-level operating income using the number of written orders but at their actual $\$ 14$ cost per order instead of $\$ 30$ (except for SRU, whose actual cost is $\$ 30$ per order). How will Snark Corporation evaluate customer-level operating cost performance this period?
4. Recalculate the customer-level operating income if salespeople had not broken up actual orders into multiple smaller orders. Don't forget to also adjust sales commissions.
5. How is the behavior of the salespeople affecting the profit of Snark Corporation? Is their behavior ethical? What could Snark Corporation do to change the behavior of the salespeople?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator