Alter’s Home Center (AHC) sells renovation and remodeling products to both contractors and individual home owners. One of the services AHC offers is delivery of the purchased products to the customer’s work site. Because not all customers take advantage of the delivery service option, ACH adds 10 percent to the cost of the products purchased to cover the delivery cost. A business intern spent the summer at ACH. The intern’s assignment was to analyze the delivery service and recommend a better way to charge customers for using it. The intern, who had studied activitybased costing, identified the following activities and the data related to them: 

The intern selected two customers, who were frequent customers, to use as an illustration of the system: Wagner Remodeling and Burlington Contractors. The intern collected the following information on these two customers for the most recent six months: 

Required

a. What would the delivery charge for each customer be under the current policy of 10 percent of order value?

b. What would the activity-based costing system estimate as the cost of delivering to each customer?

c. How could managers at AHC use the information identified by the new costing method to manage costs?

Transcribed Image Text:

Activity Picking order Delivering order. Handling complaints. Total delivery cost.. Cost Driver Number of items Number of orders Number of complaints Annual Cost $286,000 522,500 32,400 $840,900 Annual Driver Volume 357,500 items 27,500 orders 135 complaints