# Importance of this valued customer a differential

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importance of this valued customer. a Differential cost of the order is: Costs Incurred to Fill Order* Material (10,000 Units X \$2) ........................................ \$20,000 Labor (10,000 Units X \$3.60) ....................................... 36,000 Special Overhead ......................................................... 2,000 \$ 58,000 Costs Reduced for Standard Products Material ........................................................................ \$ 4,000 Labor ............................................................................ 4,500 Other ............................................................................ 450 \$ 8,950 Total Differential Costs ............................................. \$ 49,050 *Depreciation, rent, heat, and light are not affected by the order. Power might be dependent upon the particular requirements of the special units. It is assumed here that the same amount of power will be used in each case. 7.50 (Meals.com Inc.; multiple choice—special order.) a. (4) \$8,000 = \$8 per unit X 1,000 units. b. (2) \$6,000 = (\$4 + \$2) X 1,000 units. c. (1) \$0. Total fixed costs do not change as a result of the special order. 7-19 Solutions
7.50 continued. d. (4) Decrease \$0.25: Fixed Costs per Unit Without the Special Order (\$10,000 + \$8,000) ÷ 8,000 Units ................................... \$2.25 Fixed Costs per Unit with the Special Order (\$10,000 + \$8,000) ÷ 9,000 Units ............................................. 2.00 Decrease as a Result of Special Order \$ 0.25 e. (1) Increase it. 7.51 (First Bank; customer profitability analysis) Differential revenue from new accounts = \$180 X 7,000 = \$1,260,000. Differential costs of new accounts: Acquisition costs = \$200,000 – \$30,000 costs that are not differential = \$170,000 Transaction processing costs = (\$150 – \$10 non-differential costs) X 7,000 = \$980,000 Differential operating income = \$1,260,000 – \$170,000 – \$980,000 = \$110,000. The accounts increase the bank’s operating income, which is a reason to keep the student accounts. Management should also consider the likely positive effect of attracting these students as long term customers of the bank, which makes the offer to students even more attractive. 7.52 (Car-on-Truck, Inc.; customer profitability analysis) a. First compute cost driver rates. Transportation costs = \$.80 per mile = \$800,000/1,000,000 miles. Processing an order = \$1 per minute = \$100,000/100,000 minutes. Marketing management = 10% of sales = \$700,000/\$7,000,000 in sales. Special requirements—foreign = \$500 per car = \$100,000/200 cars. Solutions 7-20
7.52 a. continued. Next apply costs driver rates to customers. For each customer and each cost driv multiply the cost driver rate by the cost driver volume given in the problem. Customer X: (\$.80 X 400 miles) + (\$1 X 30 minutes) + (\$10% X \$600 sales) = \$320 + \$30 + \$60 = \$410. Customer Y: (\$.80 X 2,200 miles) + (\$1 X 35 minutes) + (\$10% X \$2,000 sales) = \$1,760 + \$35 + \$200 = \$1,995. Customer Z: (\$.80 X 1,300 miles) + (\$1 X 80 minutes) + (\$10% X \$1,500 sales) + \$500 = \$1,040 + \$80 + \$150 + \$500 = \$1,770. b. Using the sales dollars given in the problem, compute the profitability as follows: 3
7-21 Solutions