Knotts Woodproducts Company mills and distributes high-quality hardwoods to furniture manufacturers. For the purpose of measuring customer profitability, the company assigns its order processing and delivery costs to customers based on each customer's share of Knotts' total sales revenue. Of the following circumstances, which would render the resulting profitability measures misleading?
A) Customers purchase different mixes of Knotts' products.
B) All of Knotts' customers make use of the company's online ordering system.
C) All of Knotts' customers are located in North Carolina and southwestern Virginia.
D) One of Knotts' customers has adopted a just-in-time purchasing system. This customer places orders and receives shipments weekly, while other customers place and receive monthly orders.

Question

Quizplus · Accepted Answer

When one customer places orders more frequently than others, it incurs more order processing and delivery costs, which are not accurately reflected if costs are allocated based solely on sales revenue.

Knotts Woodproducts Company Mills and Distributes High-Quality Hardwoods to Furniture