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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 (ABC) system. Both the management accountants and the manufacturing managers are very pleased with the results, as they now have accurate product costing information 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 Waratahs major products are as follows: Activity PDA basic PDA+ PDA/phone Designing $ 100 $ 110 $ 125 Purchasing 150 95 130 Assembling 890 1200 1400 Finishing 260 250 250 Total activity cost $1 400 $1 655 $1 905 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 months costs had been 20 per cent above budget! The customer support supervisor, Bill Dominico, is able to explain exactly why this is happening. He has had to employ new staff, there is more overtime being worked, and some of the service 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 companys 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 $ 9 000 Customer support 78 300 123 750 20 200 Selling price per unit 2 000 2 600 2 800 The companys 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 5 Total sales 300 150 40 The costs of customer support and selling activities for each customer group are as follows: Educational Business Home entertainment Selling expenses $28 000 $25 750 $28 000 Customer support 86 000 49 750 86 500 Required: 1. Construct two Excel spreadsheets to calculate: (a) profitability of each product line (b) profitability of each customer group. 2. What can you conclude from your analysis in requirement 1? 3. Would you recommend dropping the loss-making products or customers? Explain your answer. 4. Use your spreadsheet to answer the following questions: (a) If the selling price of the PDA basic decreased to $1 600 and customer support for the PDA+ was reduced to $80 000, which product would be the most profitable? (b) If sales of the PDA/phone to business customers increased to 40 and the selling price of the PDA/ phone was increased to $3 200, which customer group would be the most profitable? 5. Explain the types of performance measures that could be introduced by Waratah to assist in understanding and managing its customers.