Assignment Problem: Analyzing Customer Profitability
Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent. On a recent job for Orvieto Industries, the company set its price as follows:
Product costs including podiums, seating, lighting, etc. $175,000
Installer salaries 25,000
Total 200,000
Markup at 35 percent 70,000
Bid price $270,000
The job turned out to be a big hassle. Orvieto requested 25 change orders, although the dollar value of the products it requested changed very little. The company also returned 33 items that had extremely minor flaws (scratches that were barely visible and would be expected in normal shipping). Orvieto also requested seven meetings with designers taking 40 hours before its plan was finalized. Normally, only two or three meetings are necessary. Alison Jackson, controller for Lauden, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the following drivers:
Driver Change orders Number of returns Design meeting hours
Annual value of Driver 850 change orders 1,000 product returns 1,300 meeting hours
Annual cost $212,500 70,000 78,000
Required:
Q1. Calculate the indirect service costs related to the job performed for Orvieto Industries.
Q2. Assuming that Orvieto Industries causes a disproportionate amount of indirect service costs, how should Lauden deal with this situation?
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