Customer profitability, customer cost hierarchy. Orsack Electronics has only two retail and two wholesale customers. Information relating to each customer for 2012 follows (in thousands):
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Orsack’s annual distribution channel costs are $34 million for wholesale customers and $5 million for retail customers. Its annual corporate sustaining costs, such as salary for top management and general administration costs, are $61 million. There is no cause and effect or benefits received relationship between any cost allocation base and corporate sustaining costs. That is, corporate sustaining costs could be saved only if Orsack Electronics were to completely shut down.
Required
1. Calculate customer level operating income using the format in Exhibit 14 5.
2. Prepare a customer cost hierarchy report, using the format in Exhibit 14 6.
3. Orsack’s management decides to allocate all corporate sustaining costs to distribution channels: $48 million to the wholesale channel and $13 million to the retail channel. As a result, distribution channel costs are now $82 million ($34 million + $48 million) for the wholesale channel and $18 million ($5 million + $13 million) for the retail channel. Calculate the distribution channel level operating income. On the basis of these calculations, what actions, if any, should Orsack’s managers take?Explain.
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