eBook External Linkages, Customer Costing, Customer Profitability Huang Company sells small machine parts to heavy equipment manufacturers for an average price of $3.10 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plant's manufacturing resources. Huang also inspects a sample of the products- each time a batch is produced to ensure that the customer's specifications have been met. Inspection takes essentially the same time regardless of the type of part being produced. Huang's Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year): Frequently Ordering Customers Less Frequently Ordering Customers Sales orders 28,000 Average order size 2,800 Number of setups 33,250 Scheduling hours 43,750 Inspections 33,250 Average unit cost $1.71 2,800 28,000 5,250 5,250 5,250 $1.71 "This cost does not include the cost of the following "customer-related" activites: Customer-related activity costs: Processing sales orders Scheduling production Setting up equipment Inspecting batches Total Required: $2,464,000 1,176,000 3,696,000 4,928,000 $12,264,000 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. ebook External Linkages, Customer Costing, Customer Profitability Huang Company sells small machine parts to heavy equipment manufacturers for an average price of $3.10 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plant's manufacturing resources. Huang also inspects a sample of the products each time a batch is produced to ensure that the customer's specifications have been met. Inspection takes essentially the same time regardless of the type of part being produced. Huang's Cost Accounting Department has provided the following budgeted data for customer-related activities and costs (the amounts expected for the coming year): Frequently Ordering Less Frequently Customers Ordering Customers Sales orders 28,000 2,800 Average order size 2,800 28,000 Number of setups 33,250 5,250 Scheduling hours 43,750 5,250 Inspections 33,250 5,250 Average unit cost $1.71 $1.71 "This cost does not include the cost of the following "customer-related" activites: Customer-related activity costs: Processing sales orders Scheduling production Setting up equipment Inspecting batches i Total Required: $2,464,000 1,176,000 3,696,000 4,928,000 $12,264,000 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Setting up equipment Inspecting batches Total Required: 3,696,000 4,928,000 $12,264,000 1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Sales revenue Customer-related activity costs Calculate the profitability of each customer type. (Because sales revenues for each customer type are equal, the profitability will be the same for each customer type.) 2. Assign the customer-related activity costs to each customer type using activity rates. Enter the appropriate activity rates below. Processing sales orders Scheduling production Setting up equipment Inspecting batches per order per scheduling hour per setup per inspection Calculate the profitability of each customer category. Frequent Infrequent Customer Profitability