Ray Panneton, president of Okus Designs, met with his CFO and vice president of marketing to discuss the profitability of the company’s top 10 customers. These customers account for 80% of the company’s revenues. The following table was prepared by the accounting department to assist Ray in his decision making.

Required

a. Ray is concerned about the customers with negative customer profit margins. If these customers are dropped, what will be the new total customer net profit and customer profit margin (assume the cost of sales and selling costs can be eliminated and round customer profit margin to one decimal place)?

b. Ray is also concerned about customers with customer profit margins below the current company average. If all customers with below-average profit margins are dropped, what will be the new total customer net profit and customer profit margin (assume the cost of sales and selling costs can be eliminated, and round customer profit margin to one decimal place)?

c. Compare your answers to parts (a) and (b). What do you notice?

d. If Ray were to drop all customers with profit margins below average, how much in new customer revenues would need to be added to make the company as well off as it would be if it only dropped the customers with negative profit margins? Use an average profit margin for the new customers equal to the one you calculated in part (a).

e. What action do you recommend Ray take?

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Cost of Selling Customer Net Customer Customer Revenues Sales Costs Profit (Loss) Profit Margin Meredith's Boutique $ 4,950,000 $ 3,750,000 $ 760,000 440,000 8.9% Stewart Industries 4,890,000 3,618,600 925,000 346,400 7.1% T&P Incorporated Talley Design Studios 4,500,000 3,400,000 1,080,000 20,000 0.4% 4,200,000 3,192,000 1,130,000 (122,000) (2.9%) UPPtown Productions 4,100,000 2,870,000 902,000 328,000 8.0% O'Brien's Tavern 3,900,000 2,850,000 875,000 175,000 4.5% House of Claire 277,500 (314,000) (362,500) 3,850,000 2,887,500 685,000 7.2% Copper Metalworks J Floral Designs Old Main Masonry (8.5%) (10.0%) 3,700,000 2,664,000 1,350,000 3,625,000 2,501,250 1,486,250 3,500,000 2,485,000 770,000 245,000 7.0% Total/Average $41,215,000 $30,218,350 $9,963,250 1,033,400 2.5%