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 manufacturing managers are very pleased with the results, as they now have accurate product costing information that they can use for the 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 follow:

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 cost 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 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 customer 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 success to have access to the records of his department for the past three months (june quater). 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 quater. The analysis reveals the following data:

Note: Total activity cost is per unit

The cost of selling and customer support activities, and selling price for each product, are as follow:

	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 instructions 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

Note: the total sales for Customer groups during June quarters is in units.

1. Calculate -Profitability of each product line & 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. if the selling price of the PDA Basic decreased to $ 1600 and customer support for the PDA+ reduced to $80,000, which product would be most profitable?
5. If sales of the PDA/Phone to business customer increased to 40 and selling price of the PDA/Phone increased to $3200 which customer group would be the most profitable?

6. Explain the types of performance measure that could be introduced by Waratah to assist in understanding and managing their customers.