As in requirement 2 there is however no cause and

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Cornerstones of Cost Management
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Chapter 11 / Exercise 11.19
Cornerstones of Cost Management
Hansen/Mowen
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as in requirement 2. There is, however, no cause-and-effect or benefits-received relationship between corporate costs and any allocation base, i.e., the allocation of $51,000,000 to the wholesale channel and of $14,000,000 to the retail channel is arbitrary and not useful for decision-making. Therefore, the management of Ramish Electronics should not base any performance evaluations or investment/disinvestment decisions based on these channel-level operating income numbers. They may want to take corporate costs into account, however, when making pricing decisions. Wholesale Wholesale Wholesale Customers Customers Customers Retail Retail Retail Customers Customers Customers Total Total Total Total Total Total North North North America America America South South South America America America Total Total Total Big Big Big Sam Sam Sam World World World (all (all (all customers) customers) customers) Wholesale Wholesale Wholesale Wholesaler Wholesaler Wholesaler Wholesaler Wholesaler Wholesaler Retail Retail Retail Stereo Stereo Stereo Market Market Market (1) (1) (1) = (2) (2) (2) + (5) (5) (5) (2) (2) (2) = (3) (3) (3) + (4) (4) (4) (3) (3) (3) (4) (4) (4) (5) (5) (5) = (6) (6) (6) + (7) (7) (7) (6) (6) (6) (7) (7) (7) Revenues (at actual prices) $1,152,500 $930,000 $390,000 $540,000 $222,500 $123,000 $99,500 Customer-level costs 1,006,305 794,000 331,850 a 462,150 a 212,305 120,700 a 91,605 a Customer-level operating income 146,195 136,000 $ 58,150 $ 77,850 10,195 $ 2,300 $ 7,895 Distribution-channel costs 45,000 38,000 7,000 Distribution-channel-level oper. income 101,195 $ 98,000 $ 3,195 Corporate-sustaining costs 65,000 Operating income $ 36,195
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Cornerstones of Cost Management
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Chapter 11 / Exercise 11.19
Cornerstones of Cost Management
Hansen/Mowen
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14-11 14-21 14-21 14-21 (20 30 min.) Customer Customer Customer profitability, profitability, profitability, service service service company. company. company. 1. 2. Customers Ranked on Customer-Level Operating Income Avery Avery Avery Okie Okie Okie Wizard Wizard Wizard Grainger Grainger Grainger Duran Duran Duran Revenues $260,000 $200,000 $322,000 $122,000 $212,000 Technician and equipment cost 182,000 175,000 225,000 107,000 178,000 Gross margin 78,000 25,000 97,000 15,000 34,000 Service call handling ($75 150; 240; 40; 120; 180) 11,250 18,000 3,000 9,000 13,500 Web-based parts ordering ($80 120; 210; 60; 150; 150) 9,600 16,800 4,800 12,000 12,000 Billing/Collection ($50 30; 90; 90; 60; 120) 1,500 4,500 4,500 3,000 6,000 Database maintenance ($10 150; 240; 40; 120; 180) 1,500 2,400 400 1,200 1,800 Customer-level operating income $ 54,150 $ (16,700) $ 84,300 $(10,200) $ 700 Cumulative Cumulative Cumulative Customer-Level Customer-Level Customer-Level Operating Operating Operating Income Income Income Customer-Level Customer-Level Customer-Level Customer-Level Customer-Level Customer-Level Cumulative Cumulative Cumulative as as as a % of of of Total Total Total Operating Operating Operating Customer Customer Customer Operating Operating Operating Income Income Income Customer-Level Customer-Level Customer-Level Customer-Level Customer-Level Customer-Level Customer Customer Customer Income Income Income Revenue Revenue Revenue as as as a % of of of Revenue Revenue Revenue Operating Operating Operating Income Income Income Operating Operating Operating Income Income Income Code Code Code (1) (1) (1) (2) (2) (2) (3) (3) (3) = (1) (1) (1) (2) (2) (2) (4) (4) (4) (5) (5) (5) = (4) (4) (4) $112,250 $112,250 $112,250 Wizard $ 84,300 $ 322,000 26.18% $ 84,300 75% Avery 54,150 260,000 20.83% 138,450 123% Duran 700 212,000 0.33% 139,150 124% Grainger (10,200) 122,000 -8.36% 128,950 115% Okie (16,700) 200,000 -8.35% 112,250 100% $112,250 $1,116,000
14-12 The above table and graph present the summary results. Wizard, the most profitable customer, provides 75% of total operating income. The three best customers provide 124% of IS’s operating income, and the other two, by incurring losses for IS, erode the extra 24% of operating income down to IS’s operating income. 3. The options that Instant Service should consider include: a. Increase the attention paid to Wizard and Avery. These are “key customers,” and every effort has to be made to ensure they retain IS. IS may well want to suggest a minor price reduction to signal how important it is in their view to provide a cost- effective service to these customers.

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