CASE 13.2 CUSTOMER PROFITABILITY ANALYSIS. Happy Kitchen, Inc., produces several lines of dish towels and pot holders that are sold through department stores, grocery stores, and through wholesalers to smaller kitchen shops throughout the United States. The company has traditionally kept track of its sales by product line, but lately has begun to feel it should pay some attention to the different demands of customer segments on its profitability. Department stores and wholesalers are normally content with the prices Happy Kitchen charges, but the grocery store buyers are more demanding. Recently, the company has also started selling product to the wholesale warehouses, such as Costco. Here, price has really become an issue, with the customer demanding small shipments to each of its stores but at a much lower price for a bundled package of goods (such as three dish towels in one sale).

Pete Bayou, president of Happy Kitchen, decided to hire a team of consultants to investigate the profitability of each of its customer segments. The study results were broken down by dish towels and pot holders to give the company more information about where things were going well and where attention might need to be paid. The consulting team also used internal information to develop the as is budget for each segment of business so the results could be compared with plan. It did not address fixed overhead because it was felt to be out of the control of the product lines. The results of the consulting teams study are in the following tables.

What surprised the president of Happy Kitchen was the fact that profitability on pot holders was so much lower than had originally been thought. The addition of A BCM costs to the analysis had really made a difference. What was also of concern was the fact that the warehouse stores were not carrying their fair share of general overhead yet. If that had been raised to be equivalent to the other segments, it is doubtful it would have shown any profits at all.

Pete really wants to dig a bit further into this analysis and has asked you to come in and give a hand. What Pete needs you to do is the following.

REQUIRED:

A. Prepare a variance analysis report for the two products across their four customer segments.

B. Analyze the results and note where Pete should place his attention and where things are going okay.

C. What should Pete do about the warehouse store sales? They have added a lot of volume to the business, leading to the need to put on another shift in both products and add staff to the back office. If the volume is eliminated, quite a few employees will have to be laid off.

Happy Kitchen, Inc. Customer Profitability Analysis-Kitchen Towels Happy Kitchen, Inc. Customer Profitability Analysis-Pot Holders Happy Kitchen, Inc. Customer Profitability Analysis-Kitchen Towels Happy Kitchen, Inc. Customer Profitability Analysis-Pot Holders