Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 66

Customer Profitability Analysis Doreen Company has gathered the following data pertaining to activities it performed for two of its major customers.

	Jerry Inc.	Donald Co.
Number of orders	5	30
Units per order	1,000	200
Sales returns:
Number of returns	2	5
Total units returned	40	175
Number of sales calls	12	4

Doreen sells its products at $200 per unit. The firm’s gross margin ratio is 25 percent. Both Jerry and Donald pay their accounts promptly and no accounts receivable is over 30 days. After a careful analysis using a business intelligence software on the operating data for the past 30 months the firm has determined the following activity costs:

Activity	Cost Driver and Rate
Sales calls	$ 1,000 per visit
Order processing	300 per order
Deliveries	500 per order
Sales returns	100 per return and $5 per unit returned
Sales salary	100,000 per month

Required

1. Classify activity costs into cost categories and compute the total cost for Doreen Company to service Jerry Inc. and Donald Co.

2. Compare the profitability of these two customers.

Step 1 of 5

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.