customer profitability and relevant costs

Allied west a wholesaler of specialized furniture, supplies furniture to three local retailers, Vogel, Brenner and Wisk. Exhibit 1 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 Variable Variable Fixed Revenues Cost of goods sold Furniture- handling labor Furniture - handling equipment cost written off as depreciation Customer Vogel Brenner Wisk Total $500,000 $300,000 $400,000 $1,200,00 370,000 220,000 330,000 920,000 41,000 18,000 33,000 92,000 12,000 4,000 9,000 25,000 Fixed Variable Variable 14,000 11,000 13,000 8,000 9,000 7,000 14,000 10,000 12,000 36,000 30,000 32,000 Fixed Fixed Rent Marketing support Sales order and delivery processing General administration Allocated corporate-office costs Total costs Operating income 20,000 10,000 12,000 6,000 16,000 8,000 48,000 24,000 491,000 $ 9,000 284,000 432,000 $16,000 $(32,000) 1,207,000 $(7,000) COM 01: should Allied west drop Wisk customer?! Alt1: With wisk Alt2: Drop wisk Differential analysis 1,200,000 500,000+300,000 (400,000) = 800,000 relevant Revenue -T.V.C COGS 920,000 Furniture handling labor 92,000 Marketing support 30,000 370,000+220,000 330,000 = 590,000 relevant 41,000+18,000 = 33,000 59,000 relevant 11,000+9,000 = 10,000 20,000 relevant 13,000+7,000 = 12,000 20,000 relevant 689,000 385,000 111,000 (15,000) 32,000 1,074,000 126,000 Sales order and delivery processing T.V.C. C.M -T.F.C Furniture- handling equipment cost written off as depreciation Rent 25,000 25,000 0 irrelevant 36,000 36,000 General administration 48,000 48,000 0 irrelevant 0 irrelevant 0 irrelevant 0 24,000 24,000 Allocated corporate-office costs T.FC 133,000 (non 133,000 0.1 (7,000) (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? 03: 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. Allied west a wholesaler of specialized furniture, supplies furniture to three local retailers, Vogel, Brenner and Wisk. Exhibit 1 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 Variable Variable Fixed Revenues Cost of goods sold Furniture- handling labor Furniture - handling equipment cost written off as depreciation Customer Vogel Brenner Wisk Total $500,000 $300,000 $400,000 $1,200,00 370,000 220,000 330,000 920,000 41,000 18,000 33,000 92,000 12,000 4,000 9,000 25,000 Fixed Variable Variable 14,000 11,000 13,000 8,000 9,000 7,000 14,000 10,000 12,000 36,000 30,000 32,000 Fixed Fixed Rent Marketing support Sales order and delivery processing General administration Allocated corporate-office costs Total costs Operating income 20,000 10,000 12,000 6,000 16,000 8,000 48,000 24,000 491,000 $ 9,000 284,000 432,000 $16,000 $(32,000) 1,207,000 $(7,000) COM 01: should Allied west drop Wisk customer?! Alt1: With wisk Alt2: Drop wisk Differential analysis 1,200,000 500,000+300,000 (400,000) = 800,000 relevant Revenue -T.V.C COGS 920,000 Furniture handling labor 92,000 Marketing support 30,000 370,000+220,000 330,000 = 590,000 relevant 41,000+18,000 = 33,000 59,000 relevant 11,000+9,000 = 10,000 20,000 relevant 13,000+7,000 = 12,000 20,000 relevant 689,000 385,000 111,000 (15,000) 32,000 1,074,000 126,000 Sales order and delivery processing T.V.C. C.M -T.F.C Furniture- handling equipment cost written off as depreciation Rent 25,000 25,000 0 irrelevant 36,000 36,000 General administration 48,000 48,000 0 irrelevant 0 irrelevant 0 irrelevant 0 24,000 24,000 Allocated corporate-office costs T.FC 133,000 (non 133,000 0.1 (7,000) (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? 03: 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