Chapter 6: Measuring and Managing Customer Relationships
– 107 –
6-22 (a) If Saunders reduced its sales discounts so that net revenues increased
by 10%, the net revenue would increase to $220,000 and operating
With 10%
Initial
Revenue Increase
Net sales revenues
$200,000
$220,000
Variable costs
80,000
80,000
Contribution margin
120,000
140,000
Fixed costs
70,000
70,000
Operating profit
$50,000
$70,000
% change in operating profit
40%
(b) If sales discounts increased by another 2%, the net revenue would
decrease to $196,000 and operating profit would decrease by ($50,000
With 2%
Initial
Additional
Discount
Net sales revenues
$200,000
$196,000
Variable costs
80,000
80,000
Contribution margin
120,000
116,000
Fixed costs
70,000
70,000
Operating profit
$50,000
$46,000
% change in operating profit
8%
circumstances in this problem,
Change in operating profit = (Initial revenue × x%)
– 108 –
Another way to view the relationships is to note that the last expression
above is
Since
we have
Percentage change in operating profit = x% Initial profit margin.
6-23 (a) Based on the information given, Donner is more profitable and Carlson
is unprofitable:
Carlson
Donner
Sales
$450,000
$400,000
Cost of goods sold
180,000
80,000
Gross margin
270,000
320,000
MDSA expenses
320,000
65,000
Operating profit
$−50,000
$255,000
under the sales revenue scheme.
Carlson
Donner
Cost to
Company
Sales
$450,000
$400,000
Commission on sales revenue
2%
2%
Chapter 6: Measuring and Managing Customer Relationships
– 109 –
Total commissions on revenue
$9,000
$8,000
$17,000
Operating profit
$−50,000
$255,000
Commission on profit
4%
4%
Total commissions on profit
$0
$10,200
$10,200
– 110 –
6-24 The customer lifetime value, CLV, for Customer 421 is calculated by
summing [(Mt − ct) × (rt)t − 1]/(1 + i)t, where i = the cost of capital, for t = 1,
…, 6 and then subtracting the initial acquisition cost. In this problem, rt = 0.8
each year and i = 0.1. Calculations were performed in Excel and rounded,
t
Mt
ct
(rt)t − 1
(1 + i)t
[(Mt − ct) × (rt)t − 1]/(1 + i)t
1
$250
$ 60
1.0
1.1
$172.7273
2
300
50
0.8
1.21
165.2893
3
325
50
0.64
1.331
132.2314
4
350
50
0.512
1.4641
104.9109
5
375
40
0.4096
1.61051
85.2003
6
400
40
0.32768
1.771561
66.5881
$726.9472
CLV = $726.95 − $600 = $126.95.
Score
Number of
Responses
Percentage
of Total
10
641
12.82%
9
1265
25.30%
8
1254
25.08%
7
228
4.56%
6
548
10.96%
5
493
9.86%
4
357
7.14%
3
63
1.26%
2
42
0.84%
1
109
2.18%
5,000
Chapter 6: Measuring and Managing Customer Relationships
– 111 –
PROBLEMS
6-26 This question is designed to generate discussion on what constitutes a desirable
customer. Although a credit customer who charges a large dollar volume and
pays the balance in full on time each month is probably a good credit risk, the
customer is not the most profitable to the credit card issuer. (However, some
Type 6 is the least desirable type of customer because that type generates no
revenue but causes the issuer to incur costs to send statements. Type 1 is
preferable to Type 6, but less preferable than all the remaining types because
Atkinson, Solution Manual t/a Management Accounting, 6E
6-27 (a)
Customer
Type 1
Customer
Type 2
Customer
Type 3
Customer
Type 4
Sales
$1,000
$1,000
$2,500
$3,000
Less returns
0
200
500
1,500
Net sales
$1,000
$800
$2,000
$1,500
Cost of goods sold,
75% of sales
750
600
1,500
1,125
Processing mail orders,
$5 per nonphone order
0
30
20
0
Process phone orders,
$80 per hour
20
0
0
80
Process returns,
$5 per item returned
0
20
10
120
Process overnight
delivery requests,
$4 per request
4
0
0
48
Maintain customer
relations
50
50
50
50
Profit
$176
$100
$420
$77
Profit Sales
0.18
0.10
0.17
0.03
of sales, slightly above customer type 3’s ratio. Cost of goods sold
represents 75% of sales revenue, so the remaining costs as a percent of
sales pertain to each customer’s interaction with the company.
Customer type 4 is the most expensive to service because it orders
Chapter 6: Measuring and Managing Customer Relationships
– 113 –
and 3 are fairly low-cost to serve because they order via mail and
request regular delivery rather than overnight delivery.
handle overnight delivery requests.
6-28 Key points in the essay should include the items below. Exercise 6–19
provides a numerical example for developing a whale curve.
displaying the result in percent format. These percents will be plotted
along the x-axis. Compute the cumulative revenues in column D and
cumulative revenue percentages (divide each entry in column D by the
total of all revenues in column D) in column E. Beginning with the
the products have been plotted, as in Exhibit 6–2. A graph for customers
would be plotted similarly.
Typically, companies find that their top-selling 20% of products or
customers generate about 80% of total sales. The lowest volume 40% of
profits.
The “In Practice: Building a Whale Curve of Customer Profitability”
describes in detail how to prepare a whale curve with a spreadsheet and
Excel. (Also see Exercise 6-19, which describes adding a starting point of
0.) Briefly, rank the customers from most profitable to least profitable (or
profit). Continuing with the next most profitable customer, plot the point
indicating (Customer 2’s percentage, cumulative percent of total profit).
Continue to plot (customer percentage, cumulative percent of profit in this
manner until points representing all the customers have been plotted, as in
Exhibit 6–3.
company’s actual reported profits). The hump (or maximum height) of a
cumulative profitability curve generally hits 150% to 250% of total profits,
and this height is usually achieved by the most profitable 20% to 40% of
customers.
6-29 (a)
Customer 1
Customer 2
1. Volume discount if 20 or more units
are ordered
2%
2%
2. Pay in full in 15 days
3%
3. Cooperative advertising allowance for
featuring the company’s products in its
advertisements
4%
4%
4. Take a large shipment before the end
of the quarter in advance of an
expected seasonal increase in demand
5%
5. Online ordering discount
2%
2%
6. Rebate on sales during specific
promotional periods
2%
7. Free freight
3%
Total
21%
8%
department in an aggregate income statement account (sales
deductions); the finance department may lumps all freight costs
Chapter 6: Measuring and Managing Customer Relationships
– 115 –
the cooperative advertising allowance, volume discount
allowance, and rebates. With discounts and allowances
income statement for every customer. Furthermore, companies can use
the activity-based information on MSDA costs to base salesperson
6-30 (a)
Customer 1
Customer 2
Customer 3
Customer 4
CLV
$42.47
−$253.94
−$129.14
$27.73
discrepancy in the total.
Customer 1:
t
Mt
ct
(rt)t − 1
(1 + i)t
[(Mt − ct) × (rt)t − 1]/(1 + i)t
1
$275
$0
1
1.1
$ 250.00
2
275
0
1
1.21
227.27
3
275
0
1
1.331
206.61
4
275
0
1
1.4641
187.83
5
275
0
1
1.6105
170.75
$1,042.47
– 116 –
Customer 2:
t
Mt
ct
(rt)t − 1
(1 + i)t
[(Mt − ct) × (rt)t − 1]/(1 + i)t
1
$300
$0
1
1.1
$272.73
2
300
0
1
1.21
247.93
3
300
0
1
1.331
225.39
$746.06
CLV = $746.06 − $1,000 = −$253.94
Customer 3:
t
Mt
ct
(rt)t − 1
(1 + i)t
[(Mt − ct) × (rt)t − 1]/(1 + i)t
1
$275
$0
1.0
1.1
$250.00
2
275
0
0.9
1.21
204.55
3
275
0
0.81
1.331
167.36
4
275
0
0.729
1.4641
136.93
5
275
0
0.6561
1.6105
112.03
$870.86
Customer 4:
t
Mt
ct
(rt)t − 1
(1 + i)t
[(Mt − ct) × (rt)t − 1]/(1 + i)t
1
$275
$50
1
1.1
$ 204.55
2
275
25
1
1.21
206.61
3
300
0
1
1.331
225.39
4
300
0
1
1.4641
204.90
5
300
0
1
1.6105
186.28
$1,027.73
CLV = $1,027.73 − $1,000 = $27.73
to Customers 1 and 3, note that Customer 4 has same total (M − c) as
Customers 1 and 3. The additional cost to serve and retain Customer 4
in years 1 and 2 provides net benefits in the form of higher margins in
later periods, yielding a positive CLV that is only slightly lower than