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# Allied office products

reputation on its annual sales incorporated a new program called Total Forms Controls (TFC) for its clients Allied clients vary from small to large and all use their distribution center

Using the information in the text and in exhibit 5, calculate ABC based services costs for the TFC business
Storage \$1550k Requisition Handling \$1801k Basic warehouse stock selection \$ 761 k Pick-up activity \$ 734k Total \$ 5708k Data entry \$ 612k Desk top delivery \$ 250k

## Cost per activities can be found

Storage \$1550k/350,000=\$4.43 Requisition Handling \$1801k/310,000=\$5.81

Basic warehouse stock selection \$761k/775,000=\$0.98 Pick-pack activity \$ 734k/697,500=\$1.05 Desk top delivery \$ 250k/ 8500=\$29.41 Data entry \$ 612k/775,000=\$0.79

Using your new costing system, calculate distribution services costs for customer A and customer B
Customer A Average inventory Requisitions Number of lines 350 cartons@ \$4.43=1550.5 364@\$5.81=2114.84 910@\$0.98=891.8 Customer B 700cartons@\$4.43=3101 790@\$5.81=4589.9 2500@\$0.98=2450

Pick-pack
Annual freight cost

910@\$1.05= 955.5
\$ 2,250 nil nil 910@\$0.79=718.9 \$8,483

2500@\$1.05=2625
\$ 7,500 \$7000@1.5%*3=315 26 per year@\$29.41=764.66 2500@\$0.79=1975 \$23321

Extra charging after 9 months Desk top deliveries Data entry Total

## Costs for Customer A & B:

Customer A: \$1500+\$2250=\$3750

Customer B: \$50,000+\$7500=\$57,500

## What inference do you draw about the profitability of these 2 customers?

Currently customer A & B both face the service charges of 32.2% of its total product costs \$ 50,000 that is \$16,100. Customer A: \$16,100 8483 = \$7617 Customer B: \$23321 16,100 =\$7221

As shown here, A was over charged \$ 7,617 while B was under charged \$ 7,221 From another viewpoint: old method ABC method customer A \$79,320 customer B \$79,320 customer A \$79,320 \$50,000 \$8,483 \$20,837 customer B \$79,320 \$50,000 \$23,321 \$5,999

sales

## \$50,000 \$50,000 \$16,100 \$13,220 \$16,100 \$13,220

% in gross profit

17.0%

17.0%

26.0%

7.7%

## Should TFC implement the SBP pricing system

Yes, so that it can change out distribution services Equality and fairness to all customers Reduced prices beneficial

## Provides profit opportunity

Profit margins increasing Distribution centers

What managerial advice do you have for Allied about the Total Forms Control (TFC) business? How does Exhibit 1 relate to this question?
Adjustment of the management area to level of service true and fair treatment to the clients Fees must be charged for usage of distribution centre at level of services provided to clients.