Problem 11 - S7
Relevant Cost Analysis
Customer Profitability
Broadway Printers operates a printing press with a monthly capacity of 2,000 machine-hours.
Broadway has two main customers, Taylor Corporation and Kelly Corporation. Data on each
customer for January follows:
			Taylor	Kelly
			Corporation	Corporation	Total
Revenues			$132,000	$88,000	$220,000
Variable costs			46,200	52,800	99,000
Fixed costs (allocated on the basis of revenues)	66,000	44,000	110,000
Total operating costs		112,200	96,800	209,000
Operating invome		$19,800	$(8800)	$11,000
Machine-hours required		1,500 hours	500 hours	2,000 hours
REQUIRED:
1. Should Broadway drop the Kelly Corporation business? If Broadway drops the Kelly Corp.
business, its total fixed costs will decrease by 20%.
2. Kelly Corporation indicates that it wants Braodway to do an additional $88,000 worth of
printing jobs during February. These jobs are identical to the existing business Broadway
did for Kelly in January in terms of variable costs and machine-hours required. Broadway
anticipates that the business from Taylor Corporation in February will be the same as that
in January. Broadway can choose to accept as much of the Taylor and Kelly business for
February as it wants. Assume that total fixed costs for February will be the same as the
fixed costs in January. What should Broadway do? What will Braodway's operating
income be in February?