15-42. CUSTOMER PROFITABILITY AND ETHICS. KC Corporation manufactures an air-freshening device called GoodAir, which it sells to six merchandising firms. The list price of a GoodAir is $30, and the full manufacturing costs are $18. 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 $10 per order in addition to regular salary). KC Corporation makes products based on anticipated demand. KC carries an inventory of GoodAir, so rush orders do not result in any extra manufacturing costs over and above the $18 per unit. KC ships finished product to the customer at no additional charge for either regular or expedited delivery. KC incurs significantly higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to KC, and the company subtracts these returns from gross revenue. The customers are not charged a restocking fee for returns. Budgeted (expected) customer-level cost driver rates follow: Order taking (excluding sales commission) $ 15 per order Product handling $ 1 per unit Delivery $ 1.20 per mile driven Expedited (rush) delivery $175 per shipment Restocking $ 50 per returned shipment Visits to customers $125 per customer Because salespeople are paid $10 per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order-taking cost by $7 per smaller order (from $15 per order to $8 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 KC's clients follows: AC DC MC JC RC BC Total number of units purchased 225 520 295 110 390 1,050 Number of actual orders 5 20 6 9 18 Number of written orders LO 20* 9 12 24 36 Total number of miles driven to deliver all products 360 580 350 220 790 850 Total number of units returned 15 40 0 0 35 40 Number of returned shipments 2 0 0 1 5 Number of expedited deliveries 0 8 0 3 4 * Because DC places 20 separate orders, its order costs are $15 per order. All other orders are multiple smaller orders and so have actual order costs of $8 each. Required 1. Classify each of the customer-level operating costs as a customer output unit-level, customer batch-level, or customer-sustaining cost. 2. Using the preceding information, calculate the expected customer- level operating income for the sixcustomers of KC Corporation. Use the number of written orders at $15 each to calculate expectedorder costs. 3. Recalculate the customer-level operating income using the number of written orders but at their actual $8 cost per order instead of $15 (except for DC, whose actual cost is $15 per order). How will KCCorporation evaluate customer-level operating cost performance this period? 4. Recalculate the customer-level operating income if salespeople had not broken up actual orders intomultiple smaller orders. Don't forget to also adjust sales commissions
