Advanced: Customer profitability analysis. ST is a distribution company that buys a product in bulk from manufacturers, repackages the product into smaller packs and then sells the packs to retail customers. ST’s customers vary in size and consequently the size and frequency of their orders also varies.

Some customers order large quantities from ST each time they place an order. Other customers order only a few packs each time.

The current accounting system of ST produces very basic management information that reports only the overall company profit. ST is therefore unaware of the costs of servicing individual customers. However, the company has now decided to investigate the use of direct customer profitability analysis (DCPA).

ST would like to see the results from a small sample of customers before it decides whether to fully introduce DCPA.

The information for two customers, and for the whole company, for the previous period was as follows:

Required:

(a) Prepare a direct customer profitability analysis for each of the two customers. (6 marks)

(b) Explain how ST could use DCPA to increase its profits.
(4 marks)
CIMA P2 Performance management

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Customer B D Company 75 40.5 450 Factory contribution ($000) Number of: Packs sold (000) Sales visits to customers 50 50 24 Orders placed by customers 75 20 Normal deliveries to customers 45 Urgent deliveries to customers 5 22240 27 300 12 200 700 15 240 30 Activity costs: $000s Sales visits to customers 50 Processing orders placed by customers 70 Normal deliveries to customers 120 Urgent deliveries to customers 60