ABC-based services cost for the TFC business

Activity Total Cost Activity Driver Activity Driver Activity Based

Unit Cost
Storage $1,550,000 Number of 350,000 $4.43
Cartons
Requisition $1,801,000 Number of 310,000 $5.81
Handling Requisition
Basic $761,000 Number of 775,000 $0.98
Warehouse Requisition
Stock Selection Lines
Pick-Pack $734,000 Number of Pick 697,500 $1.05
Activity and Req. Lines
Data Entry $612,000 Number of 775,000 $0.79
Requisition
Lines
Desk Top $250,000 Number of 8,500 $29.41
Delivery Desktop
Deliveries
Total $5,708,000

Distribution service costs for Customer A and Customer B

Activity Activity Activity Activity Driver Units Distribution Cost
Based Driver
Cost
Customer A Customer B Customer A Customer B
Storage $4.43 Cartons 350 700 $1,550 $3,100
Requisition $5.81 Requisition 364 790 $2,115 $4,590
Handling s
Basic $0.98 Requisition 910 2,500 $894 $2,455
Warehouse s Lines
Stock
Selection
Pick- $1.05 Lines 910 2,500 $958 $631
Pack Requiring
Activity pick-pack
Data Entry $0.79 Requisition 362 790 $719 $1,974
Lines
Desktop $29.41 Desktop 26 $8,500 $765
Delivery Deliveries
Inventory $315
Handling
Freight $2,250 $7,500
Total $8,486 $23,330

Profitability for Customer A and B

Old Method ABC Method

Profitability Customer A Cutomer B Customer A Customer B
Sales $79,320 $79,320 $79,320 $79,320
Cost of Product 50,000 50,000 50,000 50,000
Services Fee 16,100 16,100 8,486 23,330
Gross Profit 13,220 13,220 20,837 5,999
Percentage of 17% 17% 26% 8%
Profit

Using the ABC Method we were able to calculate a Service Fee Amount of $8,486 for
Customer A, and $23,330 for Customer B. Subtracting these totals from the Service Fee Total
of $16100 found from the old method shows that Customer A was over charged $7,614 and
Customer B was under charged $7,230. It would be fair then to adjust the Service Fees
charged to each customer to the Totals found using the ABC method. Customer A was found
to cost Allied Office Products less money to service, but they were also a smaller source of
potential growth for the company. Customer B was found to use a larger amount of services,
and has a higher opportunity of increasing Allied Office Product s revenue. Our suggestion
would be to maintain the level of usage of Customer B and increase their service fees.
Customer B is more dependent on Allied Office Products, and its unlikely they would take
their business elsewhere. Customer A is less dependent on Allied Office Products since they
use fewer services, and it would be easier for them to take their business elsewhere. We
would also suggest maintaining the amount charged for Customer As service fees and
increasing their level of usage.
In addition we would recommend TFC implementing and applying the sales based
pricing (SBP) system. As it currently stands TFC charges all customers, regardless of size,
the same percentage of service costs. With the current method there are customers who may
be over charged for services they are not using or only use a small amount of services, while
other customers are being under charged for services they use a large amount of. By
switching to the SBP system it will help make the charges that Allied Office Products charges
fair by only charging the customer for what they are actually using, and also helping make
Allied Office Products cost allocation process better. A better cost allocation process allows
for better analysis of customers to have the knowledge of the more profitable customers, and
over time TFC can improve profit by focusing on managing individual accounts in order to
identify the most profitable accounts.