Activity-Based Costing and Customer-Driven Costs Lambo Auto Limited manufactures
ID: 2558079 • Letter: A
Question
Activity-Based Costing and Customer-Driven Costs Lambo Auto Limited manufactures a limited edition luxury car that it sells through distributors. The company sells the cars to its distributors for $100,000 each and is very willing to accommodate the requirements of its distributors in order to increase volume. Even though the car sells for a high price, the small batch production methods result in only modest profits. In addition to the normal manufacturing and operating costs that result in a margin on each auto sold of about $10,000, the company incurs some additional costs because of its close relationship to its distributors. These include sales and service calls ($2,500 each); engineering changes ($10,000 each); special packaging for overseas shipment ($10,000 each); and order processing costs ($2,500 each). While these costs seem quite high, the company believes that it controls the demands of its distributors to keep the costs low Below is a chart of the additional costs required by each of its distributors: Changes Made 0 10 50 75 Sales/Service Calls Packaging Requests 0 Orders Placed Distributor Cars Sold Atkins Brower Caldwell Driscoll 100 100 100 100 10 20 40 80 4 10 20 Required: Determine the profitability of each customer and recommend action to the company Operating Income Atkins Brower Caldwell Driscoll TotalExplanation / Answer
Answer
Atkins
Brower
Caldwell
Driscoll
per unit
No. of driver
Amount ($)
No. of driver
Amount ($)
No. of driver
Amount ($)
No. of driver
Amount ($)
Sales revenue
100000
100
10000000
100
10000000
100
10000000
100
10000000
Less: Expenses
0
0
0
0
Sales & Service calls
2500
10
25000
20
50000
40
100000
80
200000
Engineering changes
10000
0
0
10
100000
50
500000
75
750000
Special packing
10000
0
0
0
0
6
60000
12
120000
Order Processing cost
2500
4
10000
5
12500
10
25000
20
50000
Operating Income
75000
9965000
9837500
9315000
8880000
Operating Income
Atkins
$9,965,000
Brower
$9,837,500
Caldwell
$9,315,000
Driscoll
$8,880,000
Total
$37,997,500
Atkins
Brower
Caldwell
Driscoll
per unit
No. of driver
Amount ($)
No. of driver
Amount ($)
No. of driver
Amount ($)
No. of driver
Amount ($)
Sales revenue
100000
100
10000000
100
10000000
100
10000000
100
10000000
Less: Expenses
0
0
0
0
Sales & Service calls
2500
10
25000
20
50000
40
100000
80
200000
Engineering changes
10000
0
0
10
100000
50
500000
75
750000
Special packing
10000
0
0
0
0
6
60000
12
120000
Order Processing cost
2500
4
10000
5
12500
10
25000
20
50000
Operating Income
75000
9965000
9837500
9315000
8880000
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