Question 1 (allocating costs using ABC, product profit margin)

Generic Motors Corporation has two product lines, A and B. Its contribution margin statement for last year is as follows:
Product A Product B Total
sales volume (units) 50 100 150
Revenue $3,000 $15,000 $18,000
Variable costs:
direct materials $600 $3,000 $3,600
direct labor $1,500 $6,000 $7,500
Contribution margin $900 $6,000 $6,900
Fixed costs $5,850
Profit $1,050
Generic Motors uses ABC to allocate the fixed costs. It examined the main activities in the firm, and decided to break up the total fixed costs of $5,850 into 3 cost pools:
* "labor-related" - the total cost in this pool is $1,500, allocated based on direct labor dollars
* "sales-related" - the total cost in this pool is $1,350, allocated based on number of units
* "production setups" - the total cost in this pool is $3,000, allocated based on the number of production batches. A is produced in batches of 10 units, and B is produced in batches of 5 units.

Required:

a) for each cost pool, compute the allocation rate and the amounts allocated to product A and product B. (assume that practical capacity = total activity volume for each pool)
(hint: The amounts allocated to A and B from each pool should add up to the total cost in that pool. To allocate the costs in the "production setups" pool, you will have to compute the number of batches. If the total number of batches for A and B does not add up to 25, you are doing something wrong).
* "labor-related" pool:
allocation rate = $ per DL$
FC allocated to A = $
FC allocated to B = $
* "sales-related" pool:
allocation rate = $ per unit
FC allocated to A = $
FC allocated to B = $
* "production setups" pool:
allocation rate = $ per batch
FC allocated to A = $
FC allocated to B = $

b) using the allocated costs from (a), compute the profit margin for product A and product B.
If you get a negative number, enter it with a minus sign, i.e. enter negative $100 as -100, not ($100)
profit margin for A = $
profit margin for B = $

Question 2 (evaluating customer profitability)

You own a credit card company. You want to evaluate the profitability of two representative customers, A and B. The numbers for customers A and B are as follows:
customer A customer B
credit card balance $1,000 $400
number of transactions 100 40
number of customer-support calls 40 2

Your revenues and costs for customers are as follows:
* Revenues: The only source of revenue is the interest you charge on credit card balances. You charge customers an interest rate of 10% (10% APR). So, if the credit card balance is $100, your revenue is $100*0.1=$10.
* Costs: based on the estimates from your ABC system, each transaction costs you $0.25, and each customer-support call costs you $2. Ignore all other costs.

Required:

a) compute the revenue you get from each customer, and the costs of serving each customer.
customer A customer B
Revenue $
$

Cost of transactions $
$

Cost of customer-support calls $
$


b) compute the profit margin for each customer.
If you get a negative number, enter it with a minus sign, i.e. enter negative $200 as -200 not ($200)
profit margin for A = $
profit margin for B = $

c) if you solved (a) and (b) correctly, one of the customers should be unprofitable. What should you do about this customer?