Chapter 5:

Question 1:

At Deutschland Electronics, product lines are charged for call centre support costs based on sales revenue. Last year's summary of call centre operations revealed the following:

Surveillance Products Specialty Products

Number of calls for information 1,000 4,000

Average call length for information 3 minutes 8 minutes

Number of calls for warranties 300 1,200

Average call length for warranties 7 minutes 15 minutes

Sales revenue $8,000,000 $5,000,000

Deutschland Electronics currently allocates call centre support costs using a rate of 0.5% of sales revenue.

Required:

a. Compute the amount of call centre support costs allocated to each product line under the current system.

b. Assume Deutschland decides to use the average call length for information to assign last year's support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000. Compute the amount of call centre support costs assigned to each product line under this revised ABC system.

d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?