Question

Enviro-Tech has only two retail and two wholesale customers. Information relating to each customer for 2013 follows (in thousands):


Enviro-Tech’s annual distribution-channel costs are $ 33 million for wholesale customers and $ 12 million for retail customers. The company’s annual corporate-sustaining costs, such as salary for top management and general-administration costs, are $ 48 million. There is no cause-and-effect or benefits-received relation-ship between any cost-allocation base and corporate-sustaining costs. That is, Enviro-Tech could save corporate-sustaining costs only if the company completely shuts down.

Required
1. Calculate customer-level operating income using the format in Exhibit 14-3.
2. Prepare a customer-cost hierarchy report, using the format in Exhibit 14-6.
3. Enviro-Tech’s management decides to allocate all corporate-sustaining costs to distribution chan-nels: $ 38 million to the wholesale channel and $ 10 million to the retail channel. As a result, distribution channel costs are now $ 71 million ($ 33 million + $ 38 million) for the wholesale channel and $ 22 million ($ 12 million + $ 10 million) for the retail channel. Calculate the distribution channel–level operating income. On the basis of these calculations, what actions, if any, should Enviro-Tech’s managers take? Explain.
4. How might Enviro-Tech use the new cost information from its activity- based costing system to better manage itsbusiness?


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  • CreatedMay 14, 2014
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