Loba Law owns and operates her own business manufacturing baking sets, which she then sells to six merchandising firms. The list price of a baking set is $40, and the full manufacturing costs are $28. Loba's 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 $15 per order, in addition to their regular salary.

Loba manufactures her baking sets based on anticipated demand. She always carries an inventory of her baking sets, so rush orders do not result in any extra manufacturing costs over and above the $28 per unit. Loba ships her products to customers at no additional charge for either regular or expedited delivery, even though she often does incur significantly higher costs for expedited deliveries. Customers occasionally return shipments, and the Loba subtracts these returns from gross revenue. The customers are not charged a restocking fee for returns.

Budgeted (expected) customer-level cost driver rates are:

Order taking (excluding sales commission)	$18 per order
Product handling	$2.20 per unit
Delivery	$1.50 per mile driven
Expedited (rush) delivery	$160 per shipment
Restocking	$45 per returned shipment
Visits to customers	$130 per customer

Because salespeople are paid $15 commission per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order-taking cost by $9 per smaller order (from $18 per order to $9 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 Veronica’s clients follows:

	JD	HC	BF	PF	HD	PD
Total number of units purchased	225	520	295	110	390	1,050
Number of actual orders	5	20	4	6	9	18
Number of written orders	10	20*	9	12	24	36
Total number of miles driven to deliver all products	360	580	350	220	790	850
Total number of units returned	15	40	0	0	35	40
Number of returned shipments	3	2	0	0	1	5
Number of expedited deliveries	0	8	0	0	3	4
* Because HC places 20 separate orders, its order costs are always $18 per order. All other orders are multiple smaller orders and so have actual order costs of $9 each.

Required:

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 Loba's six customers. Use the number of written orders at $18 each to calculate expected order costs.
3. (a) Recalculate the customer-level operating income using the number of written orders but at their actual $9 cost per order instead of $18 (except for HC, whose actual cost is always $18 per order) (b) How will Loba 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.

(a) How is the behavior of the salespeople affecting the profit of the business? Is their behavior ethical? (b) What could Loba do to change the behavior of her salespeople?

Answer rating: 100% (QA)

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