KC Corporation manufactures an air-freshening device called Fresh Air, which it sells to six merchandising firms. The list price of a Fresh Air is $30, and the full manufacturing costs are $18. Salespeople receive a commission on sales, but the commission is based on number of orders taken, not on sales revenue generated or number of units sold. Salespeople receive a commission of $10 per order (in addition to regular salary). KC Corporation makes products based on anticipated demand. KC carries an inventory of GoodAir, so rush orders do not result in any extra manufacturing costs over and above the $ 18 per unit. KC ships finished product to the customer at no additional charge for either regular or expedited delivery. KC incurs significantly higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to KC, and the company subtracts these returns from gross revenue. The customers are not charged a restocking fee for returns. Budgeted (expected) customer-level cost driver rates are:
Order taking (excluding sales commission)….. $ 15 per order
Product handling …………………………….. $ 1 per unit
Delivery ……………………………………… $ 1.20 per mile driven
Expedited (rush) delivery ……………………. $ 175 per shipment
Restocking …………………………………… $ 50 per returned shipment
Visits to customers …………………………… $ 125 per customer
Because salespeople are paid $ 10 per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order-taking cost by $ 7 per smaller order (from $ 15 per order to $ 8 per order) because the smaller orders are all written at the same time. This lower cost rate is not included in budgeted rates because salespeople create smaller orders without telling management or the accounting department. All other actual costs are the same as budgeted costs.
Information about KC’s clients follows:
AC RC BC DC 520 MC 295 JC 225 1,050 18 36 850 110 Total number of units purchased Number of actual orders Number of written orders Total number of miles driven to deliver all products Total number of units returned Number of returned shipments Number of expedited deliveries 390 10 360 20 20% 580 12 220 350 790 15 40 35 40 40
KC Corporation manufactures an air-fresheni
Because DC places 20 separate orders, its order costs are $ 15 per order. All other orders are multiple smaller orders and so have actual order costs of $ 8 each.
Required
1. Classify each of the customer-level operating costs as a customer output unit– level, customer batch-level, or customer-sustaining cost.
2. Using the preceding information, calculate the expected customer-level operating income for the six customers of KC Corporation. Use the number of written orders at $ 15 each to calculate expected order costs.