12-A2 Customer Profitability

The following table gives sales, product cost, and cost-to-serve data for a company that makes three product lines: A, B, and C. The company has two customer types.

	PRODUCT A	PRODUCT B	PRODUCT C
Sales	$5,000	$6,000	$25,000
Cost of Sales	4,500	4,800	15,000
	Customer Type 1	Customer Type 2	Customer Type 3
Product A Sales	$500	$4,500	$5,000
Product B Sales	1,000	5,000	6,000
Product C Sales	13,000	12,000	25,000
Manager Visits	4	16	20

The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations for pre- and post-sales support. 1. Determine the gross profit margin percentage of sales for each product. Which product is the most profitable? 2. Determine the gross profit margin and the gross profit margin percentage of sales for each customer type. 3. Determine the cost-to-serve percentage of sales for each customer type.

4. Determine the operating income and operating income percentage of sales for each customer type.

5. Which customer is the most profitable based the following profitability measures:

a. Grossmargin

b. Gross margin percentage of sales

c. Operating income

d. Operating income percentage of sales