Question

Sleepeze Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Sleepeze's customer activity are as follows:

	Large Retailer		Smaller Retailers
Units purchased	108,000		72,000
Orders placed	36		3,600
Number of sales calls	18		882
Manufacturing costs	$43,200,000		$28,800,000
Order filling costs allocated*	$1,455,127		$970,085
Sales force costs allocated*	$719,820		$479,880
*Currently allocated on sales volume (units sold).

Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver.

Required:

Assign costs to customers by using an ABC approach. Round your answers and all intermediate calculations to the nearest dollar.

Order filling rate	$ per order
Selling call rate	$ per sales call
Cost assignment:
Large retailer	$
Smaller retailers	$

Answer 1

Assign costs to customers by using an ABC approach. Order filling rate $667 per order Selling call rate $1,333 per sales call Cost assignment: Large retailer $48,006 Smaller retailers $3,576,906 Explanation: (a) Total Activity Large Retailer Ordering Sales calls 18 36 Smaller Retailers 3,600 (36 + 3,600) = 882 (18 + 882) = Total Activity 3,636 Orders 900 Sales calls (b) Total Costs Large Retailer Ordering $1,455,127 Sales calls $719,820 Smaller Retailers Total Costs $970,085 ($1,455,127 + $970,085) = $479,880 ($719,820 + $479,880) = $2,425,212 $1,199,700

(c) Activity Rate Total Costs Ordering $2,425,212 Sales calls $1,199,700 Total Activity (B) 3,636 Orders 900 Sales calls Activity Rate = (A = B) $667 per order $1,333 per sales call (d) Cost Assignment Large Retailer Activity Rate (A) Activity (B) Ordering $667 per order 36 Orders Sales calls $1,333 per sales call 18 Sales calls Total costs assigned ABC Cost (A x B) $24,012 23,994 $48,006 Smaller Retailers Activity Rate (A) Activity (B) Ordering $667 per order 3,600 Orders Sales calls $1,333 per sales call 882 Sales calls Total costs assigned ABC Cost (A x B) $2,401,200 1,175,706 $3,576,906