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 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 Customer Vogel Brenner Wisk Total Revenues S500,000 $300,000 $400,000 $1,200,000 Variable Cost of goods sold 370,000 220,000 330,000 920,000 Variable Furniture-handling labor 41,000 18,000 33,000 92,000 Fixed Furniture - handling equipment 12,000 4,000 9,000 25,000 cost written off as depreciation 14,000 8,000 14,000 36,000 Variable Marketing support 11,000 9,000 10,000 30,000 Variable Sales order and delivery 13,000 7,000 12,000 32,000 processing General administration 20,000 12,000 16,000 48,000 Allocated corporate office costs 10,000 6,000 8,000 24,000 Total costs 491,000 284,000 432,000 1,207,000 Operating income $9.000 $16,000 $(32,000) $17,000) Fixed Rent Fixed Fixed Q1: should Allied west drop Wisk customer? 02 should Allied West Add foral 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. Clasing Alled west will have no effect on total corporate office cost and there is no alternative use for the allied west space1 04: should allied furniture's managers open another sales office (Allied south)? (Recall the new sales office revenues and costs are identical to Alied west's costs. Opening this sales office will have no effect on corporate office cost