Lowry Locomotion conducts a targeted ABC analysis of its customer service function, and concludes that it costs $10 every time a customer calls with a complaint. The cost pool is comprised of the cost of 10 customer service representatives, as well as the cost of the facility in which they are located, depreciation on their cubicles, and a fixed monthly charge for their 10 telephone lines. The entire annual cost of this cost pool is $425,000.
Lowry receives 42,500 calls per year. Management elects to reduce the cost of customer service by reducing a variety of issues about which customers are calling. After three months, the company has reduced the number of calls by 3,800, or 9 percent of the total number of calls. However, costs have not declined at all. Upon further investigation, Lowry’s manage ment realizes that it has to reduce costs by 10 percent to eliminate one customer service employee, along with the cost of the phone line associated with that position. The cost of cubicle depreciation will not decline, since it is not practical to eliminate a single cubicle. Further, the cost of facility rent will not be eliminated under any circumstances, since the company has committed to a five year lease.
Lowry eliminates another 450 customer calls, which drops the total number of calls by 10 percent, and is able to lay off one worker and eliminate one phone line. Management now realizes that it only reduces overhead costs when it reduces customer calls in increments of 4,250 calls.