# D the manager can use this information to focus her

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d.The manager can use this information to focus her sales person’s efforts on the right mix of sales and activities. For instance, LuAnne’s ranking drops because her average order size (\$6,667 = \$400,000/ 60 orders) is smaller than the average of \$8,000. LuAnne therefore imposes higher demands on organizational resources for the same sales volume.The allocation is one way of sensitizing LuAnne to the financial implications of her choices. Allocating some (or all) of the cost using orders as the allocation basis will motivate LuAnne to consider order volume as well when dealing with customers. For instance, under the accountant’s scheme, LuAnne incurs a “fixed” cost of \$1,080 per order and generates a contribution margin of 20% over manufacturing costs. Thus, LuAnne should refuse to take any order less than \$5,400 (= \$1,080 / 0.2) as this is the breakeven order size. Carefully crafted allocations, when coupled with incentive compensation, can help encourage desired activities and penalize undesired actions.9.58In this setting, the objective is to set prices proportional to the damage inflicted on the road due to use. Logic tells us that vehicle weight and distance traveled are two importantcriteria in determining damage done. Thus, we can view the pricing scheme as an “allocation” of the road cost to vehicles.Viewed in this light, a flat charge per vehicle assumes equal damage from all vehicles andis easy to implement. We only need to install booths at entrances to the toll way and automating the toll-collection is relatively simple.Adjusting the flat rate by vehicle category adjusts for weight. The scheme does not discriminate among empty and loaded trucks. Implementing the scheme is still relatively straightforward but may require a person to collect the differing toll amounts.The third allocation basis, using actual weight, is yet more sophisticated. As a continuous metric, we would term it a duration driver. There are likely significant measurement costsas the toll authority must have a mechanism to weigh each vehicle using the toll way.The final scheme is perhaps best at estimating the cost inflicted on the toll way. However,the scheme is also the most difficult from an implementation perspective. For instance, we need to monitor where a vehicle enters and exits a toll way.Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY9-31
This problem highlights some of the tradeoffs involved in choosing an allocation basis. Simple drivers such as the number of vehicles (which count and are sometimes termed count drivers) are easy to implement but are inaccurate. More complex drivers which account for weight (called duration drivers as they account for characteristics) are often more accurate measures of resources consumed. However, measuring duration drivers may impose higher costs and have greater measurement error. Overall, the choice is judgmental, as evidenced by the many observed schemes for collecting tolls.