Emery Company sells small machine parts to heavy equipment manufacturers for an

Question

Emery Company sells small machine parts to heavy equipment manufacturers for an average price of $1.05 per part. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Each time an order is placed and processed, a setup is required. Scheduling is also needed to coordinate the many different orders that come in and place demands on the plant’s manufacturing resources. Emery also inspects a sample of the products each time a batch is produced to ensure that the customer’s specications have been met. Inspection takes essentially the same time regardless of the type of part being produced. Emery’s Cost Accounting Department has provided the following budgeted data for customerrelated activities and costs (the amounts expected for the coming year):

* This cost does not include the cost of the following “customer-related” activities:
Customer-related activity costs:
Processing sales orders............ $ 2,310,000
Scheduling production............ 1,260,000
Setting up equipment............. 3,780,000
Inspecting batches.............. 5,040,000
Total.................... $12,390,000
Required:
1. Assign the customer-related activity costs to each category of customers in proportion to the sales revenue earned by each customer type. Calculate the protability of each customer type. Discuss the problems with this measure of customer protability.
2. Assign the customer-related activity costs to each customer type using activity rates. Now calculate the protability of each customer category. As a manager, how would you use this information?

Explanation / Answer

Answer:

1. Assignment of Cost of Customer Related Activity on proportion to Sales Revenue basis;

2. Assignment of Costs on Activity Basis;

Particulars Frequently Ordering Customers Less Frequently ordering customers Sales Units 21,000x2,100 = 44,100,000 44,100,000 Sales Revenue 44,100,000 x $ 1.05 = $ 46,395,000 $ 46,395,000 Cost of Goods Sold 44,100,000 x $ 0.56 = $ 24,696,000 $ 24,696,000 Processing Sales Order (Equally) $ 1,155,000 $ 1,155,000 Scheduling Production (Equally) $ 630,000 $ 630,000 Setting Up Equipments (Equally) $ 1,890,000 $ 1,890,000 Inspection Batches (Equally) $ 2,520,000 $ 2,520,000 Total Cost (Sales Revenue - Total Cost) $ 30,891,000 $ 30,891,000 Profitability $ 15,414,000 $ 15,414,000

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