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Activity Based Costing And Customer Profitability Analysis Essay.

7 Pages / 1,683 Words Published On: 30-01-2021

Louise Fairbern operates Interiors by Louise, an interior design consulting and window treatment fabrication business.

Her business is made up of two different distribution channels: a consulting business in which Louise serves two architecture firms (Adams and Betz), and a commercial window treatment business in which Louise designs and constructs window treatments for three commercial clients (Chatham, Dedham and Elm).

Louise wishes to evaluate the profitability of her two architecture-firm clients and three commercial window treatment clients, as well as evaluate the profitability of each of the two channels and the business as a whole. Information relating to the most recent quarter is:

Adams

Betz

Chatham

Dedham

Elm

Gross revenue

$234 000

$188 800

$357 380

$147 840

$73 200

Direct costs

147 000

117 200

218 400

115 720

57 040


The total overhead costs are $340 400. Louise estimates that 25% of her overhead costs relate directly to her architectural business, 40% directly to her window-treatment business, and the remainder are general in nature.

On the revenues above, Louise gave a 10% discount to Adams to lure this customer from a competitor and gave a 5% discount to Elm for advance payment in cash.

  1. Prepare an activity-based customer-cost report, distribution channel cost report and a customer-profitability analysis for the five customers. Ensure that you also include an overall total profitability analysis for the business.
  1. Write a report to Louise Fairbern relating customer costs, customer profitability, distribution channel profitability and total profitability. Support the report with the analyses you have prepared and recommend courses of action to Louise. The report excluding the computational analysis should be around 500-1000 words and should include a brief introduction, analysis, recommendation and conclusion. 

The Australian Instrument Company (AIC) consists of the Semiconductor Division and the Process Control Division, each of which operates as an independent profit centre. The Semiconductor Division employs craftspeople who produce two different electronic components: the new high-performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics:

Super-chip

Okay-chip

Direct materials

$5

$2

Direct manufacturing labour, 3 hours × $20; 1 hour × $20

60

20


Annual overhead in the Semiconductor Division totals $400 000, all fixed. Due to the high skill

level necessary for the craftspeople, the Semiconductor Division’s capacity is set at 45 000

hours per year.

One customer orders a maximum of 15 000 Super-chips per year, at a price of $80 per chip.

The rest of the Semiconductor Division’s capacity is devoted to the Okay-chip, for which there

is unlimited demand at $26 per chip.

The Process Control Division produces only one product, a process-control unit, with the following cost structure:

  • direct materials (circuit board): $70
  • direct manufacturing labour: $45 (3 hours * $15)

Fixed overhead costs of the Process Control Division are $80 000 per year.

The current market price for the control unit is $132 per unit.

A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Direct labour cost of the process-control unit would not change. The improved process-control unit could be sold for $145.

  1. Calculate the contribution margin per hour of selling the Super-chip and the Okay-chip. If no transfers of Super-chip are made to the Process Control Division, how many Super-chips and Okay-chips should the Semiconductor Division manufacture and sell? Show your calculations.
  1. The Process Control Division expects to sell 5000 process-control units this year. From the viewpoint of AIC as a whole, should 5000 Super-chips be transferred to the Process Control Division to replace circuit boards? Show your calculations.
  1. What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations and provide an explanation.
  1. If labour capacity in the Semiconductor Division were 60 000 hours instead of 45 000 hours, would you answer differently to requirement 3 above? Show your calculations and provide an explanation. (5 marks)
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[Accessed 22 September 2023].

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My Assignment Help. Activity Based Costing And Customer Profitability Analysis Essay. [Internet]. My Assignment Help. 2021 [cited 22 September 2023]. Available from: https://myassignmenthelp.com/free-samples/acc202-management-accounting/activity-based-customer-cost-report.html.


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