Customer Service Costs; Elimination of a Department.

Durabond, Inc., believes in taking care of customer complaints quickly and efficiently, so it has created both a Customer Service facility and a Repair facility. The company has a Customer Service staff of six people who operate a telephone center that works with customer warranty problems. The center occupies space the company rents for $3,000 per month, and each worker earns a monthly salary (including fringes) of $2,500. Equipment rental at the center costs another $5,000 each month. The other department, the Repair facility, that rebuilds defective units costs $15,000 per month for salaries, rent, and utilities.

The average variable cost of repairing a unit amounts to $1.50.

The company president believes the amount spent on this center is worthwhile because it allows the company to listen to customer complaints, to advise the customer on how to send the defective product back to the company, and to explain why the company cannot fix problems that occur outside the warranty period. In addition, the center prepares detailed reports on the number of customers handled each day, their questions and complaints, and the efficiency with which center personnel handle the customers. "We are in the business of making money, and a satisfied customer is the basis of our profitability"

says the company president.

You gathered the following data on defects for the past six months to help you analyze whether the company really is following the most profitable approach to customer complaints.

March 2,250 April 3,150 May 2,465 June 2,350 July 3,100 August 3,220 Total 16,535 Average 2,756 Unit variable manufacturing cost for the product is $12, and average shipping cost to and from a customer is $1 each way. The company reimburses each customer for the cost of returning a defective unit to the company.

Required:

a. Compute the total monthly cost of running the Customer Service center. Exclude shipping costs from this calculation.

b. Compute the average shipping cost per month.

c. The marketing manager wants to change to a system of sending a new product to a customer whenever a problem occurs; the customer would keep the defective product instead of shipping it to the company for repair. Under this system, the Customer Service operation would be abolished, and the repair center would be closed down.

Prepare an analysis to see if this alternative makes sense.

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