Reference no: EM13609924

Bill is one of six salespersons who works for GT Corporation, a firm specializing in industrial gears. GT has recently implemented activity based costing at its factory, and is in the process of expanding the application to include a sales force. In particular, GT is interested in estimating the cost to serve each customer. To this end, GT accumulates the cost of the sales staff as follows:

Salaries and benefits: $330,000

Travel: $32,000

Office supplies: $12,400

Total: $374,400

GT believes that all other sales related expenses, such as rent for the sales building our not controllable in the medium term, and are not directly related to the number of sales orders. GT wishes to allocate the total cost of each salesperson to its customers based on the number of sales calls made. The sales team made 1,440 calls for the last year. Bill believes that this method is flawed. He says that while larger customers may have fewer sales calls, each sales call lasts a long time. It is not unusual for the salesman to spend the entire day with the larger customer. It also is common for the salesman to visit two or three smaller customers in a day. Most of Bill's customers are smaller customers. If these customers are deemed unprofitable, Bill will have less leeway in dealing with them. In addition, Bill believes that the firm should distinguish among local and long distance customers. All of those customers are within easy driving distance, and Bill believes that their "cost to serve" should not include any allocation for travel expenses.

Required:

A. Compute the cost per order as the firm currently calculates it.

B. Evaluate the merit of Bill's argument.