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Relevant costing

The company takes orders from its customers' employees via the Internet, processes them with office supply manufacturers, and delivers the supplies to the employees who ordered them. Its customers do not need to hire anyone to order, receive, or distribute supplies.
Customers also do not need supplies inventories or warehouses. Large customers (like Coca-Cola and Hewlett-Packard) save millions of dollars per year by outsourcing their office supply tasks to Corporate Express.

The vice president of marketing believes it is worthwhile to offer limited services to small, rapidly growing businesses because they could graduate to the full line of services offered to large companies. After analyzing the profitability of serving small and large customers, you have developed the following information for typical customers:

Representative Large
Annual Data Company (500 firms)
Average number of orders per year ................................................................................ 2,000
Average sales value of supplies per order ...................................................................... $600
Average cost of supplies to Corporate Express as a percentage of sales ...................... 80%
Average processing cost per order ................................................................................ $40
Average delivery cost per order as a percentage of sales .............................................. 5%
Average cost to maintain Internet access per customer per year .................................. $ 2,000
Marketing management, average hours per customer.................................................... 100
Marketing management, total annual cost (25 employees, 2,000 hours per year) ................ $ 1,250,000
Advertising and promotion, total annual cost .................................................................. $ 2,000,000
Maintaining electronic catalogue, total annual cost ........................................................ $ 4,000,000
General and administrative support, total annual cost .................................................... $28,000,000

You believe that small companies will place one-tenth as many orders per year as a large company and the amount of an average order will be approximately $500. Marketing management time is discretionary, but you estimate that 25 hours per year should be sufficient to manage a small company account. You are unsure how to trace advertising and promotion, electronic catalogue, and general and administrative costs but suggest allocating advertising and promotion on a per customer basis. Individually or in small groups, prepare a visual and verbal presentation that explains the required items. Required
a. Compute the annual profit generated from an average large and small company.
b. If your analysis is correct, is it a worthwhile use of scarce capacity to add 10 small customers rather than one large customer? Why or why not?
c. Can you recommend possible ways to make small-customer business attractive to Corporate Express?
d. What improvements in tracing costs do you recommend?
e. Build your own spreadsheet: Develop a spreadsheet to answer (a).

Solution Summary

Excel file contains solution of a relevant costing problem.

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