Problem introduction ch 14 (like 14.31; 14.20; 14.

21))
Marvel who sells several blends of tea has decided to analyze the profitability of five new
customers. It buys blended tea per bag at (see table below) and sells tea to retail customers at
a list price of (see table below) per bag. Data pertaining to the five customers are:

  Customer:
  A B C D E
Bags sold 915 3,400 22,300 15,600 975
Purchase price $15 $16 $17 $16 $15
List selling price $25 $26 $27 $26 $25
actual selling price $24.50 $25.20 $25.30 $25.80 $21.90
number of purchase orders 8 16 32 14 38
number of customer visits 4 6 13 5 14
number of deliveries 10 26 60 23 37
miles traveled per delivery 12 5 10 8 46
number of expedited (speed) 1 0 5 0 6
deliveries

Marvels five activities and their cost drivers are:

Activity: Cost driver rate

Order taking $ 50 per purchase order
Customer visits $ 35 per customer visit
Deliveries $2 per delivery miles traveled
Product handling $ 0.90 per bag sold
Expedited deliveries $ 130 per expedited delivery

Requirements:

a) Compute the customer-level operating income of each of the five retail customers now
being examined?

b) Comment on the results, such as

1) Which is most profitable?
2) Which does have the highest volume?
3) Which is most unprofitable?
4) Which does have the smallest volumes?

c) What insights do managers gain by reporting both the list selling price and the actual
selling price for each customer?

d) What factors (4!) should managers consider in deciding whether to drop one or more of
the five customers?
Problem introduction ch 14 (like 14.22; 14.23; 14.24)

Marvel Manufacturing has four divisions named after its locations: France, Germany,
Netherlands, Italy. Corporate headquarters is in Minnesota. Blueback corporate headquarters
incurs $16,000,000 per period, which is an indirect cost of the divisions. Each division
manager is evaluated on their performance on the basis of the division margin after allocation
of the indirect headquarters costs. Corporate headquarters currently allocates this cost to the
divisions based on the revenues of each division. The CEO has asked each division manager
to suggest an allocation base for the indirect headquarters costs from among revenues,
segment margin, direct costs, and number of employees.
The following is relevant information about each division:

France Germany Netherlands Italy

Revenues $ 22.500.000 $ 24.500.000 $ 18.000.000 $ 16.000.000
Direct costs $ 15.900.000 $ 12.300.000 $ 13.000.000 $ 13.800.000
Segment Margin $ 6.600.000 $ 12.200.000 $ 5.000.000 $ 2.200.000
Number of employees 6.000 12.000 4.500 1.500

Requirements:
1. Allocate the indirect headquarters costs of Marvel Manufacturing to each of the four
divisions using:
a. the revenues as the allocation bases;
b. direct costs as the allocation bases:
c. the segment margin as the allocation bases;
d. the number of employees as the allocation bases,
and calculate operating margins for each division based on the 4 different approaches
( allocating headquarters costs).

2. Which allocation base do you think the manager of the Italy division would prefer?
Explain.

3. What factors would you consider in deciding which allocation base Marvel should use?

4. Suppose the Marvel CEO decides to use direct costs as the allocation base. Should the Italy
division be closed? Why or why not?