Christen Granite sells granite counter tops to the construction industry.
Christen Granite has three customers: Homebuilders, a small construction company that builds private luxury homes; Kitchen Constructors, a company that designs and builds kitchens for hospitals and hotels; and Subdivision Erectors, a construction company that builds large subdivisions in major metro suburbs. Following are Christen Granite€™s revenue and cost data by customer for the year ended December 31, 2012:

Operating costs include order processing, sales visits, delivery, and special delivery costs. Christen estimates that revenue and costs will increase as follows on an annual basis:

REQUIRED
1. Calculate operating income per customer for 2012 and for each year of the 2013€“2017 period.
2. Christen estimates the value of each customer by calculating the customer€™s projected NPV over the next five years (2013€“2017). Use the operating incomes calculated above to compute the value of all three customers. Christen uses a 10% discount rate.
3. Recently, Kitchen Constructors (KC), Christen€™s most valuable customer, has been threatening to leave. Lawson Tops, Christen€™s fiercest competitor, has offered KC a greater discount. KC demands a 20% discount from Christen if the latter wants to keep KC€™s business. At the same time, Christen reevaluates the KC account and anticipates annual revenue increases of only 5% thereafter. Should Christen grant KC the 20% discount? What is the five-year value of KC after incorporating the 20% discount? What other factors should Christen consider before making a final decision?
4. What are the possible adverse effects of caving in to KC€™s pressure?

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Kitchen Subdivision Homebuilders Constructors Erectors $54,000 26,400 12,000 $390,000 216,000 90,000 $1,032,00 0 660,000 282,000 Revenues Cost of goods sold Operating costs Kitchen Subdivision Homebuilders Constructors Erectors Revenues Cost of goods sold Operating costs 5% 4% 4% 15% 4% 4% 8% 4% 4%