The customer support and distribution costs associated with the three types of customers
Simple strategy cost allocation based on revenues.
Description
Customer Support & Distribution Costs
Department Stores
Specialty Shops
Gift Shops
Total
Activity Level
Activity Level
Activity Level
Revenues
$150,000
$100,000
$250,000
$500,000
Total costs/No of orders places
$40,000
10
90
900
Total costs/No of sales calls
80,000
5
195
800
Total costs/No of shipments
60,000
20
480
1,000
Total
$180,000
Customer-wise cost allocation percentage
30.00%
20.00%
50.00%
100.00%
Customer-wise cost allocation amount
$54,000.00
$36,000.00
$90,000.00
$180,000.00
Cost Allocations using activity based costing (ABC).
Activity Level
Per Unit Cost
Activity Costs
Total Activity Cost
No of orders places
Department Stores
10
$18.00
180.00
Specialty Shops
90
$36.00
3,240.00
Gift Shops
900
$36.00
32,400.00
35,820.00
No of sales calls
Department Stores
5
$18.00
90.00
Specialty Shops
195
$36.00
7,020.00
Gift Shops
800
$36.00
28,800.00
35,910.00
No of shipments
Department Stores
20
$18.00
360.00
Specialty Shops
480
$36.00
17,280.00
Gift Shops
1,000
$36.00
36,000.00
53,640.00
Total Cost Customer-wise
630.00
27,540.00
97,200.00
125,370.00
Contribution margin less customer support and distribution costs
An organization's contribution margin is the amount of money, in percentage or dollars, available as a result of sales that can contribute to the fixed overhead costs of the organization. The contribution margin it is also extremely significant for instance, higher the amount of contribution margin higher will be the spending of the company in terms of per unit sales. Lastly the breakeven analysis, breakeven analysis is a position, which shows that at what level of sales the profit will be zero, the most vital function of breakeven, is that it shows the relation between the production, volume, cost and return (Hansen & Mowen, 2000). It can further be extended to see the changes on the fixed cost, prices of commodity etc, in other words it shows the lowest amount of money to run the business, which is necessary to avoid losses.
Contribution Margin = Sales Revenue - Variable cost - customer support and distribution costs
Variable Cost Calculations:
Description
Department Stores
Specialty Shops
Gift Shops
Total
Per Unit cost
8
5
10
Sales Unit
10000
5000
5000
Total Variable Cost
75000
25000
50000
150000
Calculation for Contribution Margin
Simple strategy cost Approach
Department Stores
CM=
$150,000
-
75000
-
$54,000.00
=
$21,000.00
Specialty Shops
CM=
$100,000
-
25000
-
$36,000.00
=
$39,000.00
Gift Shops
CM=
$250,000
-
50000
-
$90,000.00
=
$110,000.00
Total
=
$170,000.00
Activity Based Costing Approach
Department Stores
CM=
$150,000
-
75000
-
$630.00
=
$74,370.00
Specialty Shops
CM=
$100,000
-
25000
-
$27,540.00
=
$47,460.00
Gift Shops
CM=
$250,000
-
50000
-
$97,200.00
=
$102,800.00
Total
=
$224,630.00
Type of customer the company support
The Company should support the Gift Shop customers, because the gifts shop is generating the highest amount of revenue. Besides this the Contribution Margin of Gift Shops customers is also highest as compared to other two type of customers, under both the approaches.
Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the capacity of production of a company. In traditional costing systems, the basic aim is to value the inventories and cost of goods sold in accordance with the GAPP (Generally Accepted Accounting Principles) whereas in ABC costing system there are two primary cost systems involved. These systems report accounting based data to both internal and external authorities. It is also used to determine the costs for product for special management reports. The method was founded in 1972 and is basically aimed at improving the traditional costing methods to provide better decision making alternatives to corporations (Grossman & Livingstone, ...