Kingston Company produces precision components. Kingston has 11 customers, one of which accounts for 60 percent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase components in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Kingston's customer activity follow: Large CustomerTen Small CustomersUnits purchased 300,000 200,000 Orders placed 12 420 Number of sales calls 20 230 Manufacturing cost$900,000 $600,000 Sales$1,800,000 $1,200,000 Order-filling costs for Kingston Company total $360,000, and sales-force costs are $300,000. Required:a. Determine the profitability of each of the two classes of customers (large and small). Allocate the order-filling
and sales force costs to the customers based on sales volume.b. Determine the profitability of each of the two classes of customers (large and small). Allocate the order-filling and sales force costs to the customers using an activity-based costing approach.
What will be an ideal response?
a.
Large: 300,000/(300,000 + 200,000) × ($360,000 + $300,000) = $396,000; Small: 200,000/(300,000 + 200,000) × ($360,000 + 300,000) = $264,000.
| Large Customer | Ten Small Customers | ||||||
| Revenues | $ | 1,800,000 | $ | 1,200,000 | |||
| Manufacturing cost | $ | 900,000 | $ | 600,000 | |||
| Order-filing & sales-force costs | $ | 396,000 | $ | 264,000 | |||
| Operating profit | $ | 504,000 | $ | 336,000 | |||
Order-filling: Large: 12/(12 + 420) × $360,000 = $10,000; Small: 420/(12 + 420) × $360,000 = $350,000.
Sales-force: Large: 20/(20 + 230) × $300,000 = $24,000; Small: 230/(20 + 230) × $300,000 = $276,000.
| Large Customer | Ten Small Customers | ||||||
| Revenues | $ | 1,800,000 | $ | 1,200,000 | |||
| Manufacturing cost | $ | 900,000 | $ | 600,000 | |||
| Order-filing costs | $ | 10,000 | $ | 350,000 | |||
| Sales-force costs | $ | 24,000 | $ | 276,000 | |||
| Operating profit | $ | 866,000 | $ | (26,000 | ) | ||
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