1.

Customer-level operating income based on actual orders and adjusted commissions

Customers
AC DC MC JC RC BC
Revenues
$30 × 225; 520; 295; 110; 390; 1,050 $6,750 $15,600 $8,850 $3,300 $11,700 $31,500
Less: Returns
$30 ×15; 40; 0; 0; 35; 40 450 1,200 0 0 1,050 1,200
Net Revenues
$30 ×210; 480; 295; 110; 355; 1,010 6,300 14,400 8,850 3,300 10,650 30,300
Cost of goods sold
$18 × 210; 480; 295; 110; 355; 1,010 3,780 8,640 5,310 1,980 6,390 18,180
Gross margin 2,520 5,760 3,540 1,320 4,260 12,120
Customer-level operating
Order taking
$15 ×5; 20; 4; 6; 9; 18 75 300 60 90 135 270
Product handling
$1 × 225; 520; 295; 110; 390; 1,050 225 520 295 110 390 1,050
Delivery
$1.20 × 360; 580; 350; 220; 790; 850 432 696 420 264 948 1,020
Expedited delivery
$175 × 0; 8; 0; 0; 3; 4 0 1,400 0 0 525 700
Restocking
$50 ×3; 2; 0; 0; 1; 5 150 100 0 0 50 250
Visits to customers 125 125 125 125 125 125
Sales commissions
$10× 5; 20; 4; 6; 9; 18 50 200 40 60 90 180
Total customer-level operating 1,057 3,341 940 649 2,263 3,595
Customer-level operating income $1,463 $ 2,419 $2,600$ 671 $ 1,997 $ 8,525

5. The behavior of the salespeople is costing KC Corporation $588 in profit (the difference
between the incomes in requirements 3 and 4.) Although management thinks the salespeople
are saving money based on the budgeted order costs, in reality they are costing the firm
money by increasing the costs of orders ($1,028 in requirement 3 versus $930 in requirement
4) and at the same time increasing their sales commissions ($1,110 in requirement 3 versus
$620 in requirement 4). This is not ethical.

KC Corporation needs to change the structure of the sales commission, possibly linking
commissions to the overall units sold rather than on number of orders.

Some students might argue that the amount is not material, but in matters of ethics be wary of
the slippery slope. Most organizations do not stand for any deviation from ethical principles,
regardless of the amount involved. Students can engage in an interesting debate around this
point.