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    Activity-based costing of customers

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    10-23. Activity-Based Costing of Customers

    Marvin's Kitchen Supply delivers restaurant supplies throughout the city. The firm adds 10 percent
    to the cost of the supplies to cover the delivery cost. The delivery fee is meant to cover the cost of
    delivery. A consultant has analyzed the delivery service using activity-based costing methods and
    identified four activities. Data on these activities follow:

    Cost Driver Volume
    Activity Cost Driver Cost Driver Volume
    Processing order. . . . . . . . . . Number of orders $ 50,000 5,000 orders
    Loading truck . . . . . . . . . . . . Number of items 100,000 100,000 items
    Delivering merchandise . . . . Number of orders 60,000 5,000 orders
    Processing invoice . . . . . . . . Number of invoices 48,000 4,000 invoices
    Total overhead. . . . . . . . . . ..................................................$258,000

    Two of Marvin's customers are City Diner and Le Chien Chaud. Data for orders and deliveries to
    these two customers follow:

    City Diner Le Chien Chaud
    Order value . . . . . . . . . . . . . $50,000 $60,000
    Number of orders . . . . . . . . 52 110
    Number of items . . . . . . . . . 600 1,500
    Number of invoices . . . . . . . 12 150

    Required:

    a. What would the delivery charge for each customer be under the current policy of 10 percent
    of order value?
    b. What would the activity-based costing system estimate as the cost of delivering to each customer?
    c. How could Marvin's use the information identified by the new costing method to manage costs?

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    Solution Summary

    This solution examines the activity-based costing of customers at Marvin's Kitchen Supply.

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