Value chain customer profitability The Paint Division of Home-Time Products won an exclusive contract to sell its exterior latex house paint through the Downhome Hardware store chain. Initially, this was the company's only paint customer, but in an effort to diversify potential risk, marketing has secured three more customers. On the following page is the company's customer profitability report that is prepared at the end of each year.

Company management is not very impressed with the Paint Division's overall profit which is its lowest ever. In particular, there is concern about the declining profitability of their largest customer which yielded $500,000 to $600,000 in profits before the firm started selling to new customers. An analysis of the situation revealed the following;

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HOME-TIME PRODUCTS Paint Division Customer Profitability Report For the Year Ended December 31 Downhome Gross margin..... Sales..... Less sales discounts* Net sales... Cost of goods sold Customer service costs: Marketing*. Distribution*. Warranty/customer service* $8,000,000 305,000 Wheelright Uptown Hardware Stores Stores $4,000,000 $3,000,000 $1,000,000 $16,000,000 152,500 114,375 38,125 7,695,000 3,847,500 2,885,625 961,875 5,600,000 2,800,000 2,100,000 2,095,000 1,047,500 785,625 Discount Company City Totals 610,000 15,390,000 700,000 11,200,000 261,875 4,190,000 600,000 300,000 225,000 75,000 1,200,000 750,000 375,000 281,250 93,750 1,500,000 400,000 200,000 150,000 50,000 800,000 Total customer service costs 1,750,000 875,000 656,250 218,750 3,500,000 Customer profit... $ 345,000 $172,500 $ 129,375 S 43,125 690,000 Administrative and other division expenses 525,000 Net income ... $ 165,000 Allocated to customers based on dollar volume of sales.