Case Analysis

Charles Lamb and Sons-Analyzing Customer Profitability

Charles Lamb and Sons, a New England tobacco wholesaler, has a policy of "total distribution." It seeks to reach every potential independent retail customer in its area and to get at least a portion of his business. Robert Lamb, the marketing vice president, recently heard a talk by a marketing controller to the effect that customers differ vastly in profitability and that going after all potential customers does not make sense. The marketing controller said that many of the accounts of any established company lose money for that company on a direct cost basis. Unless account profitability is analyzed, the company will not know where to concentrate its marketing effort.

Robert Lamb returned to his office determined to check on this allegation. He knew that his larger accounts were generally more profitable than his smaller accounts; in fact, two hundred of his four thousand accounts provided 50% of his total sales and a high percentage of his profit. He decided to examine a typical small-customer account, the Easy Rider Company, to determine its profitability.

The following facts describe this account:

1. The Rider Company places one order a week for 300 US dollar.

2. A company sales man makes one call a week on the Easy Rider Company.

3. The Easy Rider Company pays its bill forty days after receiving its shipment.

Robert Lamb proceeded to determine various cots and ratios for customer account analysis:

1. The cost of the merchandise sold is 80% of sales.

2. A sales call coasts the company 30 US dollar.

3. Packing, billing, and delivery expense is approximately 15 US dollar per order sent to an average customer at an average distance.

4. The company estimates its advertising and promotion cost to be 3% of sales.

5. The inventory stock turn is eighteen times a year. That is, goods are held an average of twenty days. The company estimates its inventory holding cost at 18% of sales per year, or .05 per day.

6. The company estimate that its accounts receivables opportunity cost is 18% of sales per year, or .05 percent per day.

The computation is below

• The computation is yearly to make it simple.
• As seen in the photo, the company would lose $ 4,896.00 a year if it maintains Easy Rider Company as its customer.
• Though it will gain a little profit when only COGS, delivery, advertisement, and sales call are only deducted. (Yearly Profit=$288.00). But the company should also consider its inventory holding cost and accounts receivable opportunity cost.If deducted to the yearly sales, the transactions with Easy Rider Company would not produce profit but thousands of losses.
• You could use the yearly method (seen in the picture) to determine the profitability of the accounts

Yearly Sale to Easy Rider M S 14,400.00 (5300*4 weeks*12 months) ($14,400 * 30%) Revenue Less: COGS Expenses: Sales Call 1,440.00 Packing, Billing, Delivery 720.00 Advertising Cost 432.00 Inventory Holding Cost 2,592.00 Accounts receivable opportunity 2,592.00 Total Expenses $ 11,520.00 S 7,776.00 ($30 * 4 weeks '1' 12 months) ($15 * 4 weeks * 12 months) ($14,400*3%) ($14,400*13%) ($14,400*18%) s (4.89m)