“I was losing my shirt on field service calls. My consulting firm tells me that each call is costing me $495! I have really cut back on the number of calls, and do not dispatch a technician unless the customer has called the office at least three times. Many times, the problem seems to solve itself, saving me nearly $500!” This is Grace Daughtery’s response to complaints from her salespeople that their firm is acquiring a reputation for poor after-sales service. Grace’s firm sells process control systems used in manufacturing and maintains them under contract. Grace is the service manager for the Midwestern region.
Upon further inquiry, you discover that indirect costs account for a large proportion of the total costs connected with Grace’s operations. Indirect costs include items such as the salaries of service technicians, facility rental, trucks, office maintenance, and the cost of storing spare parts. The consulting firm went through an extensive allocation exercise to drive these costs down to individual activities such as making a field service call.

Required:
Evaluate the wisdom of Grace’s decision. In your answer, be sure to describe
(1) How the consulting firm might have arrived at its estimate and
(2) How, if at all, Grace should use the estimate for making effective decisions.