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Activity based costs at a call center for outsource decision

Smithers, Inc. manufactures and sells a wide variety of consumer products. The products are viewed as sufficiently profitable, but recently, some product line managers have complained about the charges for the call center that handles phone calls from customers about the products. Product lines are currently charged for call center support costs based on product sales revenues. The manager of product X is particularly upset because he has just obtained a report that includes the following information for last year:

PRODUCT X PRODUCT Y
Number of calls for information (X)2000 (Y)4000
Average length of calls for information 3 minutes 5 minutes
Number of calls registering complaints (X)200 (Y)1000
Average length of complaint calls 5 minutes 10 minutes
Sales volume (X)$400,000 (Y)$100,000

Product X is simple to use and consumers have little concern about adverse health effects. Product Y is more complex to use and also has many health hazard warnings on its label. Smithers currently allocates call center support costs using a rate of 5% of net sales dollars. The manager of product X argued that the current system does not trace call center resource usage to specific products. For example, product X bears four times the call center costs that product Y does although there are fewer calls related to product X, and the calls consume far less time.

What activity cost driver would you recommend to improve on the current system of assigning call center support costs to product lines? Why is your method an improvement?

Suppose Smithers announces that it will now assign call center support costs based on an activity-based cost system that uses minutes of calls as the activity cost driver. Suppose that the rate is 70 cents per minute. Compare the call center cost assignments to product X and Y under the previous system and the new activity-based cost system.
What actions can the product managers take to reduce the center costs assigned to their product lines under the previous system and the new system? What other functional areas might help reduce the number of minutes of calls for product Y?
Who might resist implementation of the new activity-based cost system?

In your response, discuss possible reactions of the call center staff and other staff who might be affected by efforts to reduce minutes of calls.

From the company's point of view, how might the activity-based costing system help in the assessment of whether to outsource the call center activities?

Solution Preview

I recommend the new activity-based cost system as this will give managers of products to reduce the number of calls. Thus it will improve efficiency of the whole company.

Compare the call center cost assignments to product X and Y under the previous system and the new activity-based cost system.
Previous system: Product X: $400,000 * 5%=$20,000
Product Y: $100,000 * 5%=$5,000
Total: $25,000

New Activity-based system: Product X: (2000 * 3 + 200 * 5) * $0.7=$4,900
...

Solution Summary

With only a few calculations, the narrative response explains the approach and conclusions about how the company can decide whether to outsource or not.

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