Question 1

Costs incurred to handle each unit sold would most likely be classified as a:

Accepted Answer

Costs incurred to handle each unit sold are directly related to the production of each individual unit and would therefore be classified as a customer output unit-level cost. This cost is incurred for each unit that is produced and sold, regardless of the size or frequency of the batch, and is therefore not a customer batch-level cost. It is also not a customer-sustaining cost, which would be incurred to maintain the overall relationship with the customer, nor is it a corporate-sustaining cost, which would be incurred to support the overall operations of the company.

Question 2

Managers who utilize customer profitability charts should drop customers that generate a negative customer operating income, since dropping an unprofitable customer will automatically cause overall income to increase.

Accepted Answer

While dropping unprofitable customers may increase overall income, it is not always the best solution as it could lead to negative consequences such as damaging the company's reputation or losing potential future business from that customer or their network. Managers should explore ways to improve the profitability of unprofitable customers before considering dropping them entirely.

Question 3

List at least three different levels of costs in a customer-cost hierarchy and an example of each.

Accepted Answer

The answer of List at least three different levels of...

Question 4

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different:

Accepted Answer

A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different types of cost drivers, benefits-received relationships, and levels of cause-and-effect relationships. Therefore, all the given choices are correct.

Question 5

It is common to find that a small number of customers generate a high percentage of operating income.

Accepted Answer

This is known as the 80/20 rule or the Pareto principle, which states that roughly 80% of the effects come from 20% of the causes. In the context of business, it means that a small group of customers are responsible for a large portion of the revenue and profits.

Question 6

Costs incurred to process orders would most likely be classified as a:

Accepted Answer

Costs incurred to process orders are typically considered customer batch-level costs, as they are generally associated with processing a group or batch of orders.

Question 7

Customer actions will LEAST affect:

Accepted Answer

Customer actions are unlikely to affect distribution-channel costs, as these costs are primarily determined by the channel partners and the mode of distribution. The other options, including customer output unit-level costs, customer batch-level costs, and customer-sustaining costs, can be directly affected by customer actions (such as the volume and frequency of orders, customization requests, and warranty claims).

Question 8

The cost of visiting customers would most likely be classified as a:

Accepted Answer

Visiting customers would most likely fall under the category of customer-sustaining cost, as it is a cost incurred in order to maintain and support relationships with customers. Customer output unit-level costs would relate to costs incurred for each unit produced, customer batch-level costs would relate to costs incurred for each batch of products produced, and corporate-sustaining costs would relate to costs incurred to sustain the entire organization as a whole.

Question 9

In analyzing customer-level indirect costs, which category of the customer-cost hierarchy would you NOT consider?

Accepted Answer

Distribution-channel costs are not specific to individual customers but rather to the channels through which products are distributed, making them irrelevant for customer-level indirect cost analysis.

Question 10

Top management and general administration costs would most likely be classified as a:

Accepted Answer

Top management and general administration costs are not directly related to producing a particular product or serving a particular customer, therefore they would be classified as corporate-sustaining costs.

Question 11

The cost of the manager of a retail distribution channel would most likely be classified as a:

Accepted Answer

The cost of the manager of a retail distribution channel would be classified as a distribution-channel cost because it is directly related to the operation and management of the channel itself, rather than specific to individual customers or batches of products.

Question 12

Which item is NOT a category in the customer cost hierarchy?

Accepted Answer

All of the above are categories in the customer cost hierarchy, so none of the above is the correct answer.

Question 13

To reduce distribution-channel costs, a company could:

Accepted Answer

The answer of To reduce distribution-channel costs, a company could:
...

Question 14

________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received)relationships.

Accepted Answer

Customer cost hierarchy categorizes costs related to customers into different cost pools based on different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect relationships. This helps a firm to allocate costs correctly and measure the profitability of its customers accurately.

Question 15

The higher the likely growth of the customer's industry and the customer's sales, the more valuable the customer.

Accepted Answer

This statement is true because if the customer's industry is growing and their sales are increasing, it indicates that they have the potential for further growth and profitability in the future. Therefore, they are considered more valuable to the company than customers who may not have the same growth potential.

Question 16

It is possible that the smallest customer in terms of revenue is the most profitable customer.

Accepted Answer

The profitability of a customer is determined by the cost of acquiring and serving that customer in relation to the revenue generated. It is possible for a small customer to require very little cost to acquire and serve, yet generate a high profit margin. On the other hand, a large customer may require significant resources to acquire and serve, yet generate very little profit margin. Therefore, the smallest customer in terms of revenue could potentially be the most profitable customer.

Question 17

ABC systems use the concept of a ________ to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool.

Accepted Answer

The answer of ABC systems use the concept of a...

Question 18

An advantage of using a bar chart to visualize customer profitability is that:

Accepted Answer

Bar charts are effective for comparing discrete categories, such as profitability per customer, making it easy to identify loss customers.

Question 19

Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:
  Required:
a. Compute the operating income for each of the five customers.
b. What options should Handy-Man Services consider in light of the customer-profitability results?
c. What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?

Accepted Answer

The answer of Handy-Man Services is a repair-service company specializing...

Question 20

To more accurately assess customer profitability, corporate-sustaining costs should be allocated.

Accepted Answer

Corporate-sustaining costs are not directly tied to any specific product or customer and should not be allocated to assess customer profitability, as they do not vary with customer activity.

Quiz 14: Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis