Consulting Group LLC has two customers Customer One generate

Consulting Group LLC has two customers. Customer One generates $150,000 in income after direct fixed costs are deducted, and Customer Two generates $200,000 in income after direct fixed costs are deducted. Allocated fixed costs total $300,000 and are assigned 30 percent to Customer One and 70 percent to Customer Two based on several different cost drivers. Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.

Calculate the amount of allocated fixed costs to be assigned to each customer, and determine the profit or loss for each customer. Should Consulting Group drop Customer Two

Solution

Customer 1 Customer 2 Net Income         1,50,000          2,00,000 Less : Allocated Fixed Cost (30:70)           -90,000 -2,10,000 Net profit/Loss            60,000            -10,000 Consulting group has earned profit of $50,000 from Customer 1 and Loss of $10,000 after allocation of common fixed cost Consulting group should not drop Customer 2, Since Allocated Fixed cost $ 3,00,000 will remain there even after They drop Customer 2 & Whole burden of $3,00,000 will be shifted to Customer 1. In the current scenario,Overall Consulting group is in Profit of $50,000 if they drop the Customer 2, Overall Company will go in net loss by 1,50,000