Question 4 West company supplies furniture to three local retailers, Mogul, Penner, and Slicer Inc. The following exhibit presents representative revenues and costs of West by customers for the year 2019. Additional information on West's costs for different activities at various levels of the cost hierarchy is as follows: Mogul $550,000 380,000 41,000 Penner $330,000 220,000 18,000 Slicer $440,000 340,000 33,000 Total $1,320,000 $940,000 $92,000 Sales Cost of goods sold Materials-handling labour Materials-handling equipment (Cost written off as amortization) Rent Marketing support Purchase orders and delivery processing General administration Total operating costs Operating income 10,000 14,000 11,000 13,000 20,000 489,000 $61,000 6,000 8,000 9,000 7,000 12,000 280,000 $50,000 8,000 14,000 10,000 12,000 16,000 433,000 $7,000 $24,000 $36,000 $30,000 $32,000 $48,000 $1,202,000 $118,000 1. Materials-handing labour costs vary with the number of units of furniture shipped to customers. 2. Different areas of the warehouse stock furniture for different customers. Materials-handling equipment in an area and amortization costs on the equipment are identified with individual customer accounts. Any equipment not used remains idle. The equipment has a one-year useful life and zero disposal price. 3. West allocates rent to each customer account on the basis of the amount of warehouse space occupied by the products to be shipped to that customer. 4. Marketing costs vary with the number of sales visits made to customers. 5. Purchase order costs vary with the number of purchase orders received; delivery processing U.S.) 1. Materials-handing labour costs vary with the number of units of furniture shipped to customers. 2. Different areas of the warehouse stock furniture for different customers. Materials-handling equipment in an area and amortization costs on the equipment are identified with individual customer accounts. Any equipment not used remains idle. The equipment has a one-year useful life and zero disposal price. 3. West allocates rent to each customer account on the basis of the amount of warehouse space occupied by the products to be shipped to that customer. 4. Marketing costs vary with the number of sales visits made to customers. 5. Purchase order costs vary with the number of purchase orders received; delivery processing costs vary with the number of shipments made. 6. West allocates fixed general administration costs to customers on the basis of dollar sales made to each customer. Required: 1. What are the relevant costs and relevant revenues when West company considers dropping the Slicer Inc. as a custom because of COVID-19? 2. Please calculate the operating income(loss) if West drop Slicer Inc. as a custom. 3. Should West keep Slicer as a customer or just drop it? Why
