Calculate current average cost of processing order, Financial Accounting

Assignment Help:

SF is a division of Sell.com, an internet retailer. SF operates two large server farms, each of which is a set of interconnected computers and hard drives that are used to process sales orders from customers. SF started out with one farm, then added a second farm as the volume of orders rose, and will eventually need to add additional farms over time. SF charges different divisions within the firm for processing sales orders for those divisions. The transfer price is the average actual cost of processing an order plus 10%. Actual costs are a mix of "fixed" costs of $10 million per server farm per year (which include depreciation, utilities, staff, etc.), and "variable" costs of about $0.05 per sales order (which relate mostly to the wages for staff involved in manually correcting about 1% of orders that have problems). The two server farms have a combined capacity to process about 20 million orders, but they are currently running at about 75% of that capacity. All divisions in Sell.com are evaluated based on their operating profits before taxes and capital charges.

(a)    Some of the divisions have begun to complain about the high order processing costs charged by SF, and refer to quotes received from outside vendors to process orders that are much lower. They suspect that part of the problem is that SF has no incentive to control its own costs, since it gets back whatever it spends plus 10%. They have threatened to "go outside" but top management has customer privacy concerns and would prefer to process orders internally, unless the gap between inside and outside costs is too much to ignore. What suggestions do you have for top management in terms of their policy for how much SF should charge other divisions for processing sales orders?

(b)   What is the current average cost of processing an order?

(c)  A more careful evaluation of the costs incurred by SF suggests that orders are in fact generated by three different customer types: a) domestic retail customers, b) overseas retail customers, and c) corporate customers. Each customer type generates about 5 million orders currently. All of the variable costs are generated by overseas retail customers, unfamiliar with some of the data fields they have to fill in when ordering goods, and about 25% of the fixed costs (relating to specialist staff costs) are created by corporate customers who need special attention. These costs are essentially fixed since they require specialists to be available 24x7, regardless of the number of corporate customer orders processed. The remaining fixed costs are common and relate equally to all 3 products. Calculate the actual cost of processing an order for each of the three customer types. Based on the new cost structure revealed, speculate on some of the changes that downstream divisions (those buying services from SF) might undertake to benefit from the results of your analysis.

(d)   While the analysis conducted in part (c) mollified some of the divisions buying services from SF (since the outside quotes they had received related to domestic retail customers), they were still uncomfortable about having to pay for excess capacity. The remaining 75% of total fixed costs were spread over the actual orders processed. More important, they felt that the cost of processing an order declined as excess capacity declined, and then would rise sharply as a new server farm comes on line. What suggestions do you have for ways to deal with this concern?


Related Discussions:- Calculate current average cost of processing order

Partnership and sole trader, what are the advantage and disadvantage to mr ...

what are the advantage and disadvantage to mr fish, mr Lobster of forming a partnership rather than a close corporation or a company?

Maturity risk premium , The real risk-free rate is 2%. Inflation is expecte...

The real risk-free rate is 2%. Inflation is expected to be 2% this year and 5% during the next 2 years. Suppose that the maturity risk premium is zero. What is the yield on 2-ye

Interest expense, April 2014 Notepayable $9,825,000 was issued. First due i...

April 2014 Notepayable $9,825,000 was issued. First due is April 1,2015. 6% interest erroneously expensed a full year''s interest

The principle of revenue, The principle that (1) requires revenue to be re...

The principle that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash and (3

Horizontal analysis - total current liabilities, 1. Complete a horizontal a...

1. Complete a horizontal analysis using the dollar and percent change in the following items from the preceding year to the current year: (one typed page: use a table format with f

Business risk in company, Q. Business risk in company? Business risk is...

Q. Business risk in company? Business risk is the likelihood of a company experiencing changes in the level of its profit before interest as a result of changes in turnover or

lifo, How do I prepare a partial income statement under each inventory met...

How do I prepare a partial income statement under each inventory method?

#title.student., t account for equipment beg, bal 80,000 disposal 22...

t account for equipment beg, bal 80,000 disposal 22,000 acquisition-41,000 end bal. 99,600 acct. depreciation equip. disposa; 8,500 beg, bal 41,500

Trustees duties in administering the d of a, Trustee's duties in administer...

Trustee's duties in administering the D of A 1) To carry out the trusts of the D of A and to distribute the property assigned to him in accordance with the provisions of the D of

Illustration of head office records-branches, Illustration of Head office r...

Illustration of Head office records In order to provide a check that branch managers and staff deal properly with goods and cash passing through their hands, goods are normally

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd