Question

Accounting Services, Inc. has two customers. Customer X generates $600,000 in income after direct fixed costs are deducted, and Customer Z generates $580,000 in income after direct fixed costs are deducted. Allocated fixed costs total $1,000,000 and are assigned 40 percent to Customer X and 60 percent to Customer Z. Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.

Required:
1. Based on this information, which of the following best describes the course of action preferred by management regarding this customer decision?A. Drop Customer Z because this customer generates a net loss.B. Drop Customer Z because this customer generates less income after direct fixed costs than Customer X. C. Keep Customer Z because eliminating this company would have the effect of increasing com-pany profit by $580,000. D. Keep Customer Z because eliminating this company would have the effect of decreasing company profit by $580,000. E. None of the answer choices is correct.

Answer 1

Answer: D. Keep Customer Z because eliminating this company would have the effect of decreasing company profit by $580,000.

Step-by-step explanation:

If Customer Z is eliminated, the company losses profit of $580,000. This is not very ideal because should this happen the entire $1,000,000 in allocated fixed costs will be shifted to Customer X because it is stated that total fixed costs remain the same regardless.

As it stands the company is making a net profit of,

=( 600,000 - (1,000,000*40%) ) + ( 580,000 - (1,000,000 * 60%)

= 200,000 + (-20,000)

= $180,000

If they eliminate Customer Z, that profit goes to a loss of,

= 600,000 - 1,000,000

= -$400,000