Activity-Based Costing 143$1.275 million ($375,000 in personnel and $900,000 in systems) is of value to
our customers, and they should be willing to pay for this. Unfortunately, if we
charge these costs to the current annual level of transactions, 7.2 million, we
arrive at a cost per transaction of about $0.175 ($1.275 million/7.2 million
transactions). Our research shows that the maximum we can charge is $0.15.
The peak demand problem is killing us.”
Denise agreed. “ Your work is well thought out and your results seem
correct. Your problem is a classic one for all systems operators. Electric utili-
ties have studied this peak load problem for decades and have developed
demand-management solutions such as off-peak discounts. Can you do any-
thing like this?”
Dave answered this one. “Some of our current customers do not need
their transactions dealt with on a real-time basis. They send us their orders at
end of day in batches, and we treat them by the next business day. I’m sure that
others would do this if given some type of incentive.”
Denise asserted that this could be the key to their profitability. “If you
were able to decrease the peak demands, your costs per transactions would de-
crease. In the extreme, assume that there was no peak loads and the 80,000 was
utilized every day. Your analysis shows that when your $1.275 million system
costs are spread over useful capacity of 29.2 transactions per year, this results
in an ideal systems cost under $0.05 per transaction.”
Eric then summarized: “This would mean that if we could sell it for
$0.15, we could be very profitable. And given the growth rate forecasts for
e-commerce, we could get rich.”
Denise then tied it all together. “Let’s see. Assume that with some man-
agement focus, you could get your costs to acquire and load a customer onto
your network down to about, say, $35,000. If you make a nickel profit on a
transaction, you would need 700,000 transactions to recoup your investment.
Given that your average customer now does about 3,000 transactions per day
(average demand of 20,000 per day/7 customers current on network), this
means that you cover your investment in about 240 days (700,000/3,000) or
eight months. After that, it’s pure profit. For larger customers, this payback
happens sooner, meaning you become profitable more quickly.”
EXHIBIT 4.7 Transaction-processing cost summary.
Value Add Idle Value Add
Portion Portion Total PortionPer sonnel $0,375,000 $375,000 $0,750,000 $0.051 [$375/7,300]
H/ W & S/ W 900,000 450,000 1,350,000 0.123 [$900/7,300]
$1,275,000 $825,000 $2,100,000 $0.174 [$1,275/7,300]System usage 20,000 ×365 days 7,300,000 transactions/day
Useful capacity 80,000 ×365 days 29,200,000 transactions/day $0.044 [$1,275/29,200]