Author Question: Which of the following is correct concerning the work sheet? a. Assets are shown as credits in the ... (Read 22 times)

frankwu · **on:** Jul 6, 2018

Which of the following is correct concerning the work sheet?
a. Assets are shown as credits in the adjusted trial balance columns.
b. Capital is shown as a credit in the balance sheet columns.
c. Revenues are shown as credits in the balance sheet columns.
d. Liabilities are shown as credits in the income statement columns.

Question 2

Customer profitability, customer-cost hierarchy.

Enviro-Tech has only two retail and two wholesale customers. Information relating to each customer for 2013 follows (in thousands):

Enviro-Tech's annual distribution-channel costs are 33 million for wholesale customers and 12 million for retail customers. The company's annual corporate-sustaining costs, such as salary for top management and general-administration costs, are 48 million. There is no cause-and-effect or benefits-received relation- ship between any cost-allocation base and corporate-sustaining costs. That is, Enviro-Tech could save corporate-sustaining costs only if the company completely shuts down.

Required:
1. Calculate customer-level operating income using the format in Exhibit 14- 3.
2. Prepare a customer-cost hierarchy report, using the format in Exhibit 14- 6.
3. Enviro-Tech's management decides to allocate all corporate-sustaining costs to distribution channels: 38 million to the wholesale channel and 10 million to the retail channel. As a result, distribution channel costs are now 71 million (33 million + 38 million) for the wholesale channel and 22 million (12 million + 10 million) for the retail channel. Calculate the distribution channellevel operating income. On the basis of these calculations, what actions, if any, should Enviro-Tech's managers take? Explain.
4. How might Enviro-Tech use the new cost information from its activity-based costing system to better manage its business?

aidanmbrowne · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

B

Answer to Question 2

1. All amounts in thousands of U.S. dollars
Wholesale Retail
North America South America Green Global
Wholesaler Wholesaler Energy Power
Revenues at list prices 375,000 590,000 175,000 130,000
Price discounts 25,800 47,200 8,400 590
Revenues (at actual prices) 349,200 542,800 166,600 129,410
Cost of goods sold 285,000 510,000 144,000 95,000
Gross margin 64,200 32,800 22,600 34,410
Customer-level operating costs
Delivery 4,550 6,710 2,230 2,145
Order processing 3,820 5,980 2,180 1,130
Sales visit 6,300 2,620 2,620 1,575
Total customer-level oper. costs 14,670 15,310 7,030 4,850
Customer-level operating. income 49,530 17,490 15,570 29,560

2. Customer Distribution Channels
(all amounts in 000s)
Wholesale Customers Retail Customers
Total Total North America South America Total Green Global
(all customers) Wholesale Wholesaler Wholesaler Retail Energy Power
(1) = (2) + (5) (2) = (3) + (4) (3) (4) (5) = (6) + (7) (6) (7)
Revenues (at actual prices) 1,188,010 892,000 349,200 542,800 296,010 166,600 129,410
Customer-level costs 1,050,860 824,980 299,670a 525,310a 243,880 151,030a 99,850a
Customer-level operating income 112,150 67,020 49,530 17,490 45,130 15,570 29,560
Distribution-channel costs 45,000 33,000 12,000
Distribution-channel-level oper. income 67,150 34,020 33,130
Corporate-sustaining costs 48,000
Operating income 19,150

aCost of goods sold + Total customer-level operating costs from Requirement 1

3. If corporate costs are allocated to the channels, the retail channel will show an operating profit of 23,130,000 (33,130,000 10,000,000), and the wholesale channel will show an operating loss of 3,980,000 (34,020,000 38,000,000). The overall operating profit, of course, is still 19,150,000, as in requirement 2. There is, however, no cause-and-effect or benefits-received relationship between corporate costs and any allocation base, i.e., the allocation of 38,000,000 to the wholesale channel and 10,000,000 to the retail channel is arbitrary and not useful for decision making. Therefore, the management of Enviro-Tech should not base any performance evaluations or investment/disinvestment decisions based on these channel-level operating income numbers. They may want to take corporate costs into account, however, when making long-run pricing decisions.

4. Enviro-Tech could use activity-based cost information to better manage its business by evaluating the customer-level costs and determining which activities are providing a value to the customer that they are willing to pay for. For example, costs of sales visits for the North America Wholesaler are 6,300, which is more than double the cost for the South America Wholesaler. Enviro-Tech should evaluate the efficiency and effectiveness of this activity for this customer grou