SOLUTIONS TO CASE STUDIES 461
This shows quite a different picture. However, the telemarketing manager is
likely to point out that his staff are paid considerably more than call centre staff
(£22,000 compared to £15,000) and that the standard cost is based on a salary
of £15,000.
The appropriate staffing for the call centre to handle 70,000 calls is 12 staff
(70, 000 / 6 , 000 = 11 .7). Given the recruitment freeze, two of the telemarketing staff
costs should be transferred to the call centre. Rental costs are adjusted accordingly.
It is arguable as to whether the lease costs should be allocated 50/50, but in the
absence of more information this is left unchanged. The revised profitability is as
in Table A4.4.
Whether based on standard costs or a reallocation of expenses between the
divisions, the originally reported profit of £100,000 to the call centre and £60, 000
to telemarketing is distorted. As the standard cost and reallocation calculations
demonstrate, the call centre is making a much smaller profit and telemarketing a
much larger profit than originally reported.
Case study 5: Cryogene Corp.
Table A3.6(a) reveals the contribution margins for each product. These are as in
Table A4.5.
Yogen, which has little more than a quarter of total sales, has the highest
contribution, followed by Cryod and Genet.
Table A3.6(b) shows the gross profit after allocating the manufacturing overhead
of £3, 500 ,000 (which is very high at 83% of the contribution) based on labour hours.
This suggests that Yogen is the only profitable product, with Cryod making a gross
loss and Genet almost breaking even. Table A3.6(b) also shows the gross profit
after allocating manufacturing overhead based on machine hours. This suggests
that both Yogen and Genet are profitable, but that Cryod is making a large loss.
Looking at the information on the right-hand side of Table A3.6(b), we can see
that Cryod has the highest number of labour and machine hours, which is why
the overhead allocation results in that product appearing to be unprofitable. If
the high level of manufacturing overhead is a consequence of high labour and/or
machine hours, then that result is acceptable. However, if there are other drivers
of overheads, such a reported result may be misleading.
Table A3.6(c) shows the allocation of overhead based on activity costing prin-
ciples, using four cost drivers: purchase orders, batches (set-ups), work orders
Table A4.5 Cryogene Corp.
Cryod Genet Yogen Total
Sales £’000 4,500 2,300 2,500 9,300
% of total sales 48% 25% 27% 100%
Contribution margin 2,100 760 1,350 4,210
Contribution % 46.7% 33% 54% 45.3%