At New England Goods Inc., product lines are charged for call center support cos

Question

At New England Goods Inc., product lines are charged for call center support costs based on sales revenue. Last year's summary of call center operations revealed the following Number of calls for information Average call length for information Number of calls for warranties Average call length for warran Surveillance Products 1,000 3 minutes 300 7 minutes Specialty Products 4,000 8 minutes 1,200 15 minutes ties Sales revenue $8,000,000 $5,000,000 New England Goods Inc. currently allocates call center support costs using a rate of 0.6% of sales revenue. Required: a. Compute the amount of call center support costs allocated to each product line under the current system b. Assume New England decides to use the average call length for information to assign last year's support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not? c. Assume New England decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system d. New England Goods assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information? e. Discuss the barriers for implementing ABC for this call center

Explanation / Answer

(a) Call center support cost under the currrent sysytem

Surveillance products: $8,000,000*0.6%= $48000

Speciality products: $5,000,000*0.6%= $30000

(b) Last year support cost = $48000+$30000 = $78000

Cost per information minute = Total support cost/Total call length

78000/35000 = $2.2285/ information call minute

Surveillance products : 3000*2.2285 = $6686

Speciality products: 32000*2.2285 = $71314

Yes, this method is more appropriate, because in this method cost is allocated on the basis of call length of each department.

(c) Total no of calls

Surveillance products : 1000+300= 1300

Speciality products: 4000+1200= 5200

Total no of calls = 1300+5200 = 6500 calls

Cost per call = Support cost/ Total no of calls

65000/6500 = $10 per call

Allocation of cost> Surveillance products: 1300*10 = $13000

Speciality products: 5200*10 = $52000

(d) If manager use method on basis of average call information profit can be increased by reducing the average call length of information.

(e) Main barrier for implementing the ABC costing for this call center is that there is no suitable basis for allocation of overheads.

Products No. of calls Total call length(minutes) Survelliance 1000 3000(1000*3) Speciality 4000 32000(4000*8) Total 5000 35000

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