Carbon Company has two classes of customers designated as C Classand D Class. The C Class customers place small, frequentorders, and the D Class customers tend to place larger, lessfrequent orders. Both types of customer are buying the sameproduct. Carbon charges a price equal to manufacturing costplus 25% for a given order. The 25% markup is set large enoughto cover nonmanufacturing costs and provide a reasonable return forCarbon. Both customer types generated the same sales in units,so Carbon's management had assumed that the customer supportcosts were about the same and priced the goods the same for eachcustomer. Carbon recently received some complaints from someof the D Class customers. Several of these customers arethreatening to take their business to other suppliers who allegedlycharge less. For example, one customer said that he could buythe same 5,000 units from a competitor for $3 per unit less thatCarbon's price. This customer wanted a price concession.
Willis Johnson, a recently hired cost accountant, suggested thatthe problem may have to do with unfair cost assignments andsuggested that customer costs be assigned to each customer categoryusing activity-based costing. He collected the followinginformation about customer-related activities and costs for themost recent quarter:
|
Activity
|
Activity cost
|
Cost driver
|
Level of cost driver
|
|
Processing sales orders
|
$1,760,000
|
Number of sales orders
|
440 sales orders
|
|
Selling goods
|
$640,000
|
Number of sales calls
|
80 sales calls
|
|
Servicing goods
|
$600,000
|
Number of service calls
|
300 service calls
|
|
C Class
|
D Class
|
|
Total units ordered
|
200,000
|
200,000
|
|
Manufacturing cost per unit
|
$100
|
$100
|
|
Sales orders
|
400
|
40
|
|
Sales calls
|
40
|
40
|
|
Service calls
|
200
|
100
|
Required: Determine the profitability of each customer class using the activity information.