Hector Gonzales runs the Floral Art Company, which supplies floral arrangements to three large supermarket chains throughout Australia. Management has become concerned about the rising costs associated with the processing and dispatch of orders. An activity analysis of the indirect costs identified the following customer-related costs.

Required

(a) Calculate the activity cost rate for each activity

(b) Assign the activity costs to each of the three customers.

(c) Calculate the contribution for each customer if the sales pattern for each is as follows: Customer 1 — $350 000; Customer 2 — $160 000; Customer 3 — $210 000.

(d) Advise the management of the Floral Art Company as to whether any changes should be made in its relationships with customers. Advise Hector as to how he should go about executing these changes.

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Total Estimated expected indirect use of cost Use of cost driver Activity cost pool Cost driver driver* Supermarket customer 2 costs 1 3 Orders processing Returns processing Delivery $200 000 $ 50 000 $100 000 Number of orders 450 300 100 50 Number of returns 100 50 25 25 Number of deliveries 700 400 200 100 Rush orders Number of rush $ 70000 $ 20000 orders 50 10 20 20 Sales visits Number of visits 100 50 25 25 * Expressed in units of measure of the driver. Sales are marked up 50 per cent on cost.