Question

Luxed Construction Ltd (LCL) is a large service firm with two products in its product mix – SP General and SP Special. Both products are allocated LCL’s head office’s Call Centre support costs on the basis of one cost allocation base – the Sales revenues. Currently, as a standard practice LLC allocates 0.75% of the sales revenue figure as the LCL’s head office’s Call Centre support cost to each of the two products. LCL’s head office’s Call Centre support costs for 2018 were $371,000.

LCL’s 2018 books reveal the following pieces of information about the two products:

                                                                       SP General                  SP Special

   Info related Calls Quantity                                   1,250                           4,850

   Info related Calls Length (average)               4 minutes                     9 minutes

   Warranty related Calls Quantity                              650                           1,950

   Warranty related Calls Length (average)       9 minutes                   19 minutes

   Sales revenue                                             $11,590,000                  $6,990,000

Required (Show all necessary working/calculations/steps, unless otherwise stated):

a.         Under the company’s current standard practice, how much of the LCL’s head office’s Call Centre support cost is allocated to SP General and SP Special for 2018?

b.         LCL’s management is contemplating a switch its head office’s Call Centre support costs allocation base to Info related Calls Length (average). Do you think it’s a good decision for LCL if the aim is to work out as accurate product cost as possible? Briefly explain your answer in your own words giving reasons for your agreeing or not agreeing to the decision (No calculations required; respond in about 70 words)?

c.         If LCL’s management actually switches its head office’s Call Centre support costs allocation base to ‘total number of Info related Calls and Warranty related Calls’ (combined for both products) to allocates its 2018 head office’s Call Centre support costs, how much of the total head office’s Call Centre support costs will be allocated to each of the two products? Compute the amount of call center support costs assigned to each product line under this revised ABC system. Round off to two decimal places where required.

d.         SP Special product’s department manager, Lisa, aims to show higher profits for her department so she is eligible for higher bonus for the year. If LCL’s management uses ‘Info related calls length (average)’ as the cost allocation base to allocate its head office’s Call Centre support costs to the two products, what guidelines Lisa might wish to give to the call centre staff to help accomplish her aim (No calculations required; respond in about 80 words)?

Answer 1

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