1.

Answer The use of data given in the question to calculate ABC based service charges is presented in the following table:
Activity Storage Requisition Handling Basic warehouse stock selection Pick-pack Activity Data entry Desktop delivery Total Cost as Per Question 1550,000$ 1801,000$ 761,000$ 734,000$ 612,000$ 250,000$ 5708,000$ Activity Driver Number of Cartons Number of Requisitions Number of Requisition Lines Number of Lines requiring pick-pack Number of Requisition Lines Number of Desktop Deliveries Activity Driver Units 350,000 310,000 775,000 697,500 775,000 8,500 Activity Based Cost 4.43$ 5.81$ 0.98$ 1.05$ .79$ 29.41$

Note:The activity driver unit for pick-up activity is calculated as: Number of requisitions estimated to be processed for 1992 = 310,000 Each requisition contains on average 2.5 lines so number of lines for 1992 = 310,000*2.5 = 775,000 Number of lines requiring pick-pack activity = 775,000*90% = 697,500

Note: All figures are rounded to nearest $

2. Answer Distribution service cost for customer A and for Customer B

Activity Activity Based Cost 4.43$ 5.81$ 0.98$ Activity Driver Activity Driver Units Customer A Customer B 350 700 364 910 790 2,500 Distribution Cost Customer A Customer B 1,550$ 3,100$ 2,115$ 894$ 4,590$ 2,455$

Storage Requisition Handling Basic warehouse stock selection Pick-pack Activity Data entry

1.05$

.79$

Desktop delivery Inventory handling Freight Total

29.41$

Number of Cartons Number of Requisitions Number of Requisition Lines Number of Lines requiring pick-pack Number of Requisition Lines Number of Desktop Deliveries

910

2,500

958$

631$

364

790

719$

1,974$

26

765$

2,250$ 8,486$

315$ 7,500$ 23,330$

Note: The calculation of inventory handling is given as under: Percentage to charge if the inventory remains over nine months = 1.5% per month Number of months the inventory stays = 3 months Fees to charge = 7,000$*.015*3 = 315$

Note: All figures are rounded to nearest $

3. Answer As seen in the above table the cost of distribution is much higher when we look at the figures calculated for Customer B, which makes Customer A more profitable then Customer B as reduced cost increases the profitability. Reason for this higher distribution cost is increased no of requisitions, increased annual freight, provision of desktop deliveries and increased storage required by the Customer B. To have an idea that how the ABC provides a clear picture of profitability regarding both customers, just view the table below which involves calculations of gross profit with current costing system and ABC as well. Current Costing System Customer A Customer B Sales Cost of sales Service charges (32.2% of COS) Gross profit
79,320$ 50,000$ 16,100$ 13,220$ 79,320$ 50,000$ 16,100$ 13,220$

ABC Customer A
79,320$ 50,000$ 8,486$ 20,834$

Customer B
79,320$ 50,000$ 23,330$ 5,990$

So from the above table it is clear that Customer A is more profitable than Customer B.

Note: All figures are rounded to nearest $

4. Answer Definitely TFC should implement and apply sales based pricing (SBP). Currently all the customers no matter small or large are being charged same percentage of service costs regardless they have used the services or not. This is not fair to the customer to charge him on the basis of cost of goods sold who is not using the services at all or using at a very small scale as compared to large customers. Customers using services more frequently should be charged more than the customers not utilizing the service facility offered by the entity. Using SBP costs would be allocated properly then before, increasing the profitability regarding different customers. Many customers will find the prices reduced to a level lower than previous costing system generated prices. It will help in making the business more profitable and make the cost allocation process better than ever.

5. Answers The area which the management needs to improve is the service charges distribution to its customers. The current costing system doesnt seem fare in charging service cost to different customers. Perhaps TFC should consider the fair treatment to all the customers including small scale customers as well so that they might not be overcharged for the provision of services by TFC. A more detailed analysis needs to be conducted by TFC to gather understanding about the level of services required by different customers from TFC depending on their scale of use of services. Service charges should be charged to different profit centers considering the service utilized by the customers belonging to that specific profit center. In exhibit 6 the current value chain of TFC is showed according to the current business process used by TFC. Currently the business forms are being manufactured from round about 13 different locations by Allied Office Products. TFC being a separate profit center operates in its own capacity. The TFC is recommended to utilize the in house production of business forms with an option to outsource the purchasing. TFC introduced a form management program to the customers, which enables them to order a specific number of forms as required form their inventory held by TFC. TFC charges for this management of form on the basis of cost of goods sold regardless the scale of service used by the customers. This charge for services include warehouse charges for holding client inventory and distribution charges to provide customers with required number of business forms at their premises. The exhibit 6 is a graphical presentation of this process.