Case 8-1: Allied Office Products

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1. Using the information in the text and in Exhibit 2, calculate “ ABC “ based service costs for the TFC business.

ActivityCostUsageActual cost
Storage 1,550 350,000 4.43
Requisition handling 1,801 310,000 5.81
Basic warehouse stock selection 761 775,000 0.98
Pick-pack activity 734 697,500 1.05
Data entry 612 775,000 0.79
Desk top delivery 250 8,500 29.41
Total 5,708 42.47

2. Using your new costing system, calculate distribution services costs for “ Customer A” and “ Customer B”.

ActivityABC costAB
Storage 4.43 350 1,550 700 3,100
Requisition handling 5.81 364 2,114.72 790 4,589.65 Basic warehouse stock selection 0.98 910 893.56 2,500 2,454.84 Pick-pack activity 1.05 910 957.62 2,500 2,630.82
Data entry 0.79 910 718.61 2,500 1,974.19
Desk top delivery 29.41 - - 26 764.71
Inventory handling 1,950.00 6,815.00
Freight - 52 2,250 156 7,500
Cost of distribution 10,434.51 29,829.21
Cost of product 50,000 50,000
Total cost 60,434.51 79,829.21
Sales income 79,320 79,320
Profit 18,885.49 -509.21

3. What inference do you draw about the profitability of these two customers? I assume customer A has a much more planned production and is more efficient when it comes to ordering forms than customer B. This makes customer A more profitable. Since customer A has less requisitions and uses less services it is cheaper than customer B, who orders more often and requires extra services. Customer B should pay extra for special services and higher level of activity.

4. Should TFC implement the SBP (Service Based Pricing) pricing system? Yes, the should implement this system because they have companies with very high levels of demand, like customer B, who should not be paying the same as customers with less demand. This means that Allied could charge some customers more, according to...
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