Question: Customer profitability and ethics Snark Corporation manufacture

Customer profitability and ethics. Snark Corporation manufactures a product called the snark, which it sells to merchandising firms such as Snark Republic (SR), Snarks-R-Us (SRU), Neiman Snark-us (NS), Snark Buy (SB), Snark-Mart (SM), and Wal-Snark (WS). The list price of a snark is $50, and the full manufacturing costs are $35. Salespeople receive a commission on sales, but the commission is based on number of orders taken, not on sales revenue generated or number of units sold. Salespeople receive a commission of $25 per order (in addition to regular salary). Snark Corporation makes products based on anticipated demand. Snark Corporation carries an inventory of snarks so rush orders do not result in any extra manufacturing costs over and above the $35 per snark. Snark Corporation ships finished product to the customer at no additional charge to the customer for either regular or expedited delivery. Snark incurs significantly higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to Snark, and these returns are subtracted from gross revenue. The customers are not charged a restocking fee for returns Budgeted (expected) customer-level cost driver rates are as follows:
Order taking (excluding sales commission)......$30 per order
Product handling..................$2 per unit
Delivery.......................$0.50 per mile driven
Expedited (rush) delivery..............$325 per shipment
Restocking...................$100 per returned shipment
Visits to customers..................$150 per customer
Because salespeople are paid $25 per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order taking cost by $16 per smaller order (from $30 per order to $14 per order) because the smaller orders are all written at the same time. This lower cost rate is not included in budgeted rates because salespeople create smaller orders without telling management or the accounting department. All other actual costs are the same as budgeted costs.
Information about Snark’s clients follows:

1. Classify each of the customer-level operating costs as a customer output-unit-level, customer batch- level, or customer-sustaining cost.
2. Using the preceding information, calculate the expected customer-level operating income for the six customers of Snark Corporation. Use the number of written orders at $30 each to calculate expected order costs.
3. Recalculate the customer-level operating income using the number of written orders but at their actual
$14 cost per order instead of $30 (except for SRU, whose actual cost is $30 per order). How will Snark Corporation evaluate customer-level operating cost performance this period?
4. Recalculate the customer-level operating income if salespeople had not broken up actual orders into multiple smaller orders. Don’t forget to also adjust sales commissions.
5. How is the behavior of the salespeople affecting the profit of Snark Corporation? Is their behavior ethical? What could Snark Corporation do to change the behavior of thesalespeople?
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  • CreatedNovember 15, 2011
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