Question 10 [CPA; product profitability] (Source: L-S,T,S & H, 2015) The costs of customer support and selling activities for each customer group are as follows: ome Educational Business entertainment Waratah Ltd manufactures electronic devices, including PDAS, MP3 and MP4 players, for home and business use. Three years ago, it implemented an activity-based costing system. Both the management accountants and the Selling $28 000 $25 750 $28 000 manufacturing managers are very pleased with the results, as they now have accurate product costing information expenses that they can use for a variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of Waratah's major products are as follows: Customer 86 000 49 750 86 500 support Activity PDA Basic PDA+ PDA/Phone Required: 1 Construct two Excel spreadsheets to calculate: Designing $100 $110 $125 Purchasing (a) Profitability of each product line. 150 95 130 (b)Profitability of each customer group. Assembling 890 1200 1400 2 What can you conclude from your analysis in requirement 1? Finishing 260 250 250 3 Would you recommend dropping the loss-making products or customers? Explain your answer. Total activity cost $1400 $1655 $1905 4 Use your spreadsheet to answer the following questions: In July, Hannah Allen, the assistant accountant, noticed that over the last six months the spending in both the Customer Support Department and the Sales Department had been steadily increasing. The previous month's costs (a) If the selling price of the PDA Basic decreased to $1600, and customer support for the PDA+ reduced to $80 000, which had been 20 per cent above budget! The customer support supervisor, Bill Dominico, is able to explain exactly why product would be the most profitable? this is happening. He has had to employ new staff, there is more overtime being worked, and some of the service (b)If sales of the PDA/Phone to business customers increased to 40 and the selling price of the PDA/Phone increased to $3200, which customer group would be the most profitable? calls have been outsourced to a third-party maintenance company. But all this was necessary, as he explains: If a customer has a problem, we have to fix it! And if we have spent more than our budget, then that is just too bad. It is important to keep customers happy. Why, only the other day the managing director was telling us how important our customers are and how customer satisfaction is critical to the company's success. Hannah asks Bill if she can have access to the records of his department for the past three months (June quarter). She intends to analyse the service calls to see exactly where the extra money is being spent. She also plans to analyse the selling expenses that have occurred during June quarter. The analysis reveals the following data: The cost of selling and customer support activities, and selling price for each product, are as follows: PDA Basic PDA+ PDA/Phone Activities: Selling $39 000 $33 750 $ 9000 Customer support 78 300 123 750 20 200 Selling price per unit 2000 2600 2800 The company's customers can be analysed into three main groups: educational institutions, business and home entertainment. The sales to these groups during the June quarter are detailed below: Customer groups PDA Basic PDA+ PDA/Phone Educational institutions 150 40 5 Business 20 30 30 Home entertainment 130 80 Total sales 300 150 40