At Deutschland Electronics, product lines are charged for call center support costs based on sales revenue. Last year's summary of call center operations revealed the following:
Surveillance Products Specialty Products
Number of calls for information 1,000 4,000
Average call length for information 3 minutes 8 minutes
Number of calls for warranties 300 1,200
Average call length for warranties 7 minutes 15 minutes
Sales revenue $8,000,000 $5,000,000
Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue.
Required:
a. Compute the amount of call center support costs allocated to each product line under the current system.
b. Assume Deutschland decides to use the average call length for information to assign last year's support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?
c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system.
d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?