Reference no: EM132746627
PittsburghPaint provides residential painting services for three home building customers: Glendale, Highwood, and Lexington. PittsburghPaint paints each house on a square footage contract price, with each customer generating about one-third of total revenues.
Customer support cost include return touchups and refinishes after the homeowner occupies the home. The company's current cost system allocates support costs to each of its three customers based upon total revenues (i.e., one-third of total support costs are allocated to each customer). Gross profits do not include these allocated support costs.
Each customer generates about one-third of PittsburghPaint's gross profit (aka gross margin). However, the company's operations manager has observed that the builders require substantially different levels of customer support following the completion of jobs.
To further investigate this observation, the following customer support data have been gathered:
Customer Cost per Driver
Support Activity Driver Unit
Major refinishes Hours on Job(#hrs) $40
Touchups # of visits (#visits) $60
Communication # of sale calls (#calls) $12
Builder Refinishes Touchups Communication
(#hrs) ( #visits) (#calls)
Glendale 29 125 305
Highwood 79 105 180
Lexington 39 180 175
Problem 1. Assuming that each of the three customers produces Gross Profit of $14,000 (excluding customer support costs), use ABC to calculate the profitability of each builder after taking into account the costs of customer support.
Problem 2. The company is considering an opportunity to expand its Lexington services. Briefly explain cost cross-subsidization, and whether it's likely to impact the analysis of this expansion opportunity using information from PittsburghPaint's current cost system.
Problem 3. Identify (list) at least one limitation of ABC systems, and briefly discuss why the company may use time-driven ABC to address this limitation.
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