Rogers Aeronautics, LTD, is a British aeronautics subcontract company that designs and manufactures electronic control systems for commercial airlines. The vast majority of all commercial aircraft are manufactured by Boeing in the U.S. and Airbus in Europe;

however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that Rogers does contract work for the two major manufacturers plus three companies in the second tier. Because competition is intense in the industry, Rogers has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage non-manufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years, Rogers Aeronautics’ CEO, Len Rogers, has become concerned that the cost of obtaining contracts and maintaining relations with its five major customers may be getting out of hand. You have been hired to conduct a customer profitability analysis.

Rogers Aeronautics’ non-manufacturing overhead consists of \($2.5\) million of general and administrative (G&A) expense, (including, among other expenses, the CEO’s salary and bonus and the cost of operating the company’s corporate jet) and selling and customer support expenses of \($3\) million (including 5% sales commissions and \($1,050,000\) of additional costs).

The accounting staff determined that the \($1,050,000\) of additional selling and customer support expenses related to the following four activity cost pools:

Financial and activity data on the five customers follows (Sales and Gross Profit data in millions):

In addition to the above, the sales staff used the corporate jet at a cost of \($800\) per hour for trips to customers as follows:

The total cost of operating the airplane is included in general and administrative expense; none is included in selling and customer support costs.
Required

a. Prepare a customer profitability analysis for Rogers Aeronautics that shows the gross profits less all expenses that can reasonably be assigned to the five customers.

b. Now assuming that the remaining general and administrative costs are assigned to the five customers based on relative sales dollars, calculate net profit for each customer.

c. Discuss the merits of the analysis in part a versus part b.

Transcribed Image Text:

Activity 1. Sales visits 2. Product adjustments 3. Phone and email contacts 4. Promotion and entertainment events Activity Cost Driver Number of visit days Cost per Unit of Activity $1,200 1,500 Number of adjustments Number of calls/contacts Number of events 150 1,500