At the Little Shop of Pants they make and sell four types of men's pants: superior, first class, regular, and economy. Every type is made in a fair assortment of sizes and colors, which are adjusted every year in response to the trends in society. They have never really worried about profitability, but recently Mr Carling, the CEO and one of the main owners, attended a management training program in Lausanne, Switzerland. There, he learned that you have to know your costs and so he asked the shop accountant to produce a summary statement, describing the profitability of each type of pants. In table below you will see the information Mr Carling received in response to his request. While he was quite happy with the overall situation, he felt that maybe it would be a good idea to get rid of those economy pants once and for all. When considering them, he felt that they did not really match his quality standards and now he could see that they did not even make a profit. So, maybe he felt, it would be a good thing to stop producing economy pants?

Summary statement for Little Shop of Pants

Superior First class Regular Economy Totals

Direct labor $210 $300 $240 $150 $900

Direct material 240 300 180 180 900

Other direct costs 300 300 180 120 900

Total direct costs 750 900 600 450 2700

Allocated fixed costs 375 450 300 225 1350

Full cost 1125 1350 900 675 4050

Sales income 1650 1400 1150 600 4800

Total profit (loss) 525 50 250 75 750

Additional Information:

2. Fixed costs are separated into two main pools:

a. Automatic sewing $600

b. Administration $750

Your analysis must focus following aspects:

Adding/Dropping of customers

Likelihood of customer retention.

Potential for sales growth.

Long-term/short-term customer profitability.

Increases in overall demand from more profitable customers

Ability to learn from customers