Focus Unit 5 – Focus on Customer Profitability
T5-1
Focus on Customer Profitability
Learning Objectives
1. Use activity-based costing techniques to measure customer profitability.
2. Identify alternatives for managing unprofitable customer accounts.
Summary of End of Chapter Material
Difficulty: E = Easy, M = Moderate, D = Difficult
Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation
AACSB: A = Analytic, C = Communication, E = Ethics
AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology
AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management,
PS = Problem Solving and Decision Making, T = Technology
IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis,
FSA = Financial Statement Analysis, PM = Performance Measurement, R = Reporting, SP = Strategic Planning
Item
L. O.
Difficulty
Level
Minutes to
Complete
Bloom’s
Taxonomy
AACSB
AICPA
PC
IMA
Ethics
Coverage
GUIDED UNIT PREPARATION
1
1
E
4
K
A
PS
CM
2
1
E
4
K
A
PS
CM
3
1
E
4
K
A
PS
FSA
4
1
E
5
C
A
PS
CM
5
2
E
5-7
K
A
PS
DA
6
2
E
4
C
A
PS
DA
EXERCISES
T5-1
1
M
10
C
A
PS
FSA
T5-2
1
M
5
AP
A
PS
CM
T5-3
1
M
8
C
A
PS
CM
T5-4
1
M
25–30
AP, AN
A
PS
CM, FSA
T5-5
1
M
20–25
AP, AN
A
PS
CM, FSA
T5-6
1
M
20–25
AP, AN, E
A
PS
DA, FSA
T5-7
1,2
M
15–20
AN, E
A
PS
CM, DA
PROBLEMS
T5-8
1, 2
D
40–45
AP, AN, E
A
PS
CM, DA,
FSA
T5-9
1, 2
D
45–50
AP, AN, E
A
PS
CM, DA,
FSA
T5-10
2
M
20–25
AN, E
A
PS
DA, FSA
T5–11
2
D
25–30
AN, E
A
PS
DA, FSA
Topic Focus
5
©petekarici/iStockphoto
T5-2
SOLUTIONS TO GUIDED UNIT PREPARATION
1. Many of the selling costs companies incur come in the form of
advertising, trade shows, etc.
2. Except for commissions, resources consumed to provide services to
allocated to customers.
3. Customer revenues
– Cost of goods sold
– Allocated selling expenses
= Customer net profit
revenues Customer
profit net Customer
margin profit Customer =
4. Customers that require a lot of assistance tend to drive up a
If a company wants customers to receive technical support in a
group.
5. First, the company needs to review its selling activities to ensure that
they are being managed efficiently and effectively. After a company
over time. If the customer does not become profitable, the company
should consider dropping the customer.
Focus Unit 5 – Focus on Customer Profitability
T5-3
6. An unprofitable customer may provide benefits that are measured in
other ways. For example, an unprofitable customer may have
SOLUTIONS TO EXERCISES
Exercise T5-1
Included
Not
Included
a.
Opening a bank account
x
b.
Supporting an online banking system
x
c.
Developing a corporate logo
x
d.
Preparing bank statements for mailing
x
e.
Renting off-site document storage facilities
(to preserve company data)
x
f.
Hosting the board of directors’ annual
meeting
x
g.
Gathering information for federal bank
auditors
x
h.
Balancing transactions at the end of the day
x
i.
Taking deposits at the drive-in window
x
j.
Providing access to safety deposit boxes
x
Exercise T5-2
processed
T5-4
Exercise T5-3
High Cost-to–
Serve
Low Cost-
to-Serve
Orders custom products in small
quantities
x
Uses standard delivery services
x
Frequently changes delivery
requirements
x
Places orders using automated
processing, such as EDI or the
Internet
x
Requires little to no pre-sales support
x
Requires installation and training
x
Requires frequent deliveries to
accommodate just-in-time inventory
system
x
Pays slowly (high accounts receivable)
x
Exercise T5-4
a.
Total Cost
(A)
Total Activity
(B)
Activity Rate
(A) ÷ (B)
Order processing
$200,000
2,500 orders
$80 per order
Telephone support
$45,000
1,500 hours
$30 per hour
Product demonstrations
$66,000
120 demonstrations
$550 per demonstration
Express deliveries
$37,500
375 deliveries
$100 per delivery
Focus Unit 5 – Focus on Customer Profitability
T5-5
b.
Individual Customer:
Sales
1,000 $3.00
$3,000
Cost of goods sold
1,000 $1.75
(1,750)
Gross profit
1,250
Selling costs
Order processing
12 orders $80
(960)
Telephone support
3 hours $30
(90)
Product demonstrations
0 demonstrations $550
(0)
Express deliveries
1 delivery $100
(100)
Customer net profit
$100
Customer profit margin
3.33%
Corporate Customer:
Sales
10,000 $3.00
$30,000
Cost of goods sold
10,000 $1.75
(17,500)
Gross profit
12,500
Selling costs
Order processing
50 orders $80
(4,000)
Telephone support
70 hours $30
(2,100)
Product demonstrations
8 demonstrations $550
(4,400)
Express deliveries
15 deliveries $100
(1,500)
Customer net profit
$500
Customer profit margin
1.67%
c. Since each corporate customer generates $500 in profit and each
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
T5-6
Exercise T5-5
a.
Total Cost
(A)
Total Activity
(B)
Activity Rate
(A) ÷ (B)
Online reservations
$240,000
40,000 online reservations
$6 per online reservation
Phone reservations
$980,000
98,000 phone reservations
$10 per phone reservation
Ticket mailings
$500,000
125,000 mailings
$4 per mailing
Courier deliveries
$160,000
10,000 deliveries
$16 per delivery
b.
Customer A:
Ticket purchases
$172,500
Ticket cost
(129,375)
Gross profit
43,125
Selling costs
Online reservations
500 reservations $6
(3,000)
Phone reservations
0 reservations $10
(0)
Ticket mailings
500 mailings $4
(2,000)
Courier deliveries
0 deliveries $16
(0)
Customer net profit
$38,125
Customer profit margin
22.10%
Customer B:
Ticket purchases
$180,000
Ticket cost
(135,000)
Gross profit
45,000
Selling costs
Online reservations
0 reservations $6
(0)
Phone reservations
600 reservations $10
(6,000)
Ticket mailings
120 mailings $4
(480)
Courier deliveries
480 deliveries $16
(7,680)
Customer net profit
$30,840
Customer profit margin
17.1%
Focus Unit 5 – Focus on Customer Profitability
T5-7
Exercise T5-6
a.
Total revenues
$15,000,000
average customer profit margin
.068
= Total customer profit margin
$1,020,000
b.
Sales
Customer net profit
Total
$15,000,000
$1,020,000
Less customer balances:
Albert
$425,000
$8,500
Brown
$1,100,000
$16,500
Carter
$1,000,000
$3,000
Dyson
$675,000
($1,350)
English
$560,000
($4,480)
Customer balances dropped
3,760,000
22,170
Adjusted totals
$11,240,000
$997,830
888
0$11,240,00
$997,830
margin profit customer average Adjusted ==
d. Chris’s first step should be to try to work with the customers and
make them more profitable. If Dyson and English cannot be made
profitable, Chris should consider dropping those two customers.