Qing Qing Enterprises Ltd. is a wholesaler that provides a variety of products to retailers in Manitoba and Saskatchewan. New owners purchased Qing Qing, and are unhappy with the internal reports available to them. One concern is that there is no process in place to evaluate the profitability of individual customers.

The following information has been gathered:

a) When an order is received from a customer, the credit status of the customer must be checked before the order is accepted. Once accepted, the items ordered are entered into the system and the quantities ordered compared to the quantities on hand. A picking document is created for the warehouse staff, listing the quantity ordered or on hand, whichever is fewer.

b) Warehouse staff then retrieves the inventory items from the warehouse and packages them on pallets for shipment. The pallets are then shipped to the customers using Qing Qingtrucks. There are established routes, so that each location has inventory delivered once per week. Shipments in Manitoba are made Mondays, Wednesdays and Fridays, with Saskatchewan shipments occurring on Tuesdays and Thursdays. If the customer requires a shipment between normal shipping dates, it can normally be accommodated but requires the driver to extend the route on the shipping date nearest the customer, whichlengthens the trip significantly. The cost is dependent upon the extra time taken to deliver to the customer who placed the rush order.

c) Customer support is provided through salespeople; each customer has a specific salesperson assigned. Meetings with salespeople have been carried out online during Covid.

Activity	Total cost of activity	Cost driver	Total volume of cost driver
Order acceptance	$27,000	# of orders received	6,000
Order entry	$63,000	# of different products	180,000
Picking inventory	$162,000	# of different products	180,000
Packing for shipment	$81,000	# of pallets delivered	9,000
Shipping costs	$168,000	# of kms driven	150,000
Rush shipments	$10,000	# of hours to customer	200
Salesperson support	$300,000	# of customers	240
Total overhead costs	$811,000

Two customers have been selected for evaluation, and totals have been calculated for the year ended September 30, 2021. Gillespie’s Ltd. purchased items with a selling price of $210,000 from Qing Qing. Qing Qing paid $130,000 to acquire these inventory items. Claridge Corp. purchased items with a selling price of $80,000 from Qing Qing. Qing Qing paid $42,000 for these items. The difference in gross profit earned from each customer is due to Gillespie’s receiving a discount in selling price for purchasing more than $200,000 during the year. The following information was gathered on the use of each cost driver by each customer.

Cost driver activity	Gillespie’s	Claridge
# of orders received from	25	52
Average # of different products purchased on EACH order	100	20
Average # of pallets sent for EACH order	3	1
# of kms driven to deliver EACH order	500	600
Total time taken for delivery of rush orders in year	0	16

Required:

2a) If activity-based costing is to be used to assign costs to customers, should the order acceptance and order processing functions be considered one activity or two? Explain your reasoning.

3.5b) Calculate the cost per unit of cost driver for each activity pool.

8.5c) Calculate the gross profit and overall profitability of Gillespie’s and of Claridge, separately. Which customer is the more desirable customer for Qing Qing?

2d) Provide one reasonable suggestion to management to make the less desirable of the two customers more profitable. Explain how this can be presented to the customer in a way that will reduce the probability the customer will change to another supplier.

Answer rating: 100% (QA)

2a The order acceptance and order processing functions should be considered as two different activit... View the full answer