Customer profitability and relevant costs Case 3: Allied west a wholesaler of specialized furniture, supplies furniture to three local retailers, Vogel, Brenner and Wisk. Exhibit I presents expected revenues and costs of Allied west by customer for the upcoming year using activity- based costing system. Allied west's management accountant assigns costs to customers based on the activities needed to support each customer. Assume the following information: - Furniture handling labor costs vary with the number of units of furniture shipped to customers - Allied west reserves different areas of the warehouse to stock furniture for different customers. For simplicity, we assume that furniture- handling equipment in an area and depreciation costs on the equipment that allied west has already acquired are identified with individual customers (customer level costs). Any unused equipment remains idle. The equipment had a one-year useful life and zero disposal value. - Allied west allocates its fixed costs to each customer on the basis of the amount of warehouse space reserved for that customer. - Marketing costs varies with the number of sales visits made to customers. - Sales order costs are batch- level costs that vary with the number of sales orders received from customers. Delivery processing costs are batch level costs that vary with the number of shipments made. - Allied west allocates fixed general- administration costs (facility level costs) to customers on the basis of customers revenues. - Allied furniture allocates its fixed corporate office costs to sales offices on the basis of the budgeted costs of each sales office. Allied west then allocates these costs to customers on the basis of customer revenues. Exhibit 1: Allied west Customer Vogel Brenner Wisk Total SS0,000 S300,000 S400,000 S1,200,000 Revenues Variable Cost of goods sold Variable Furniture- handling labor 370,000 220.000 330,000 920,000 41,000 18,000 33,000 92,000 Fixed Fumiture- handling equipment cost 12,000 written off as depreciation 4,000 9,000 25,000 Fixed Rent 14,000 8,000 14,000 36,000 Variable Marketing support Variable Sales order and delivery processing 13,000 7,000 11,000 9,000 10,000 30,000 12,000 32,000 Fixed General administration 20,000 12,000 16,000 48,000 Fixed Allocated corporate- office costs Total costs 10,000 491,000 284,000 432,000 1,207,000 6,000 8,000 24,000 Ql: should Allied west drop Wisk customer? Altt: With A2: Drop wisk ifferential analysis wisk 1,200,000 500,000-300.000- (400,000) 800,000 Revenue zelevant -TV.C 370,000-220,000- 330,000 590,000 COGS 920,000 relevant Furniture handling labor 92,000 41,000+18,000 - 59,000 33,000 relevant Marketing support 30,000 11,000-9,000 = 20,000 10,000 relevant Sales order and delivery processing 32.000 13,000+7,000 = 20.000 12.000 relevant 1,074,000 126,000 385,000 (15.000) T.V.C. 689,000 I1,000 CM -TEC Furniture- handling equipment cost written off as depreciation Rent 25,000 25,000 imelevant 36,000 36,000 imelevant General administration 48,000 48,000 imelevant Allocated corporate- office costs 24.000 24,000 imelevant TFC 133,000 (7,000) 133,000 (22.000) (15,000) I would advise allied west company to sell wisk because if it dropped wisk it's operating loss would increase by 15,000 Q2: should Allied West Add loral customer which had a customer profile much like Wisk's, assuming Allied west will have to acquire furniture handling equipment for loral costing $9,000? Q3: should allied Furniture's managers close allied west for the year? (recall that there is no disposal value for the equipment that allied west had already acquired. Closing Allied west will have no effect on total corporate office cost and there is no alternative use for the allied west space.) Q4: should allied furniture's managers open another sales office (Allied south)? (Recall the new sales office revenues and costs are identical to Allied west's costs. Opening this sales office will have no effect on corporate office cost.