Customer Profitability Analysis Remington Aeronautics LTD is a British aeronautics subcontract company that designs and manufactures electronic control systems for commercial airlines. The vast majority of all commercial aircraft are manufactured by Boeing in the U.S. and Airbus in Europe; however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that Remington does contract work for the two major manufacturers plus three companies in the second tier. Because competition is intense in the industry, Remington has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage nonmanufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years, Remington Aeronautics' CEO, John Remington, has become concerned that the cost of obtaining contracts and maintaining relations with its five major customers may be getting out of hand. You have been hired to conduct a customer profitability analysis. Remington Aeronautics' nonmanufacturing overhead consists of $1.20 million of general and administrative (G&A) expense (including, among other expenses, the CEO's salary and bonus and the cost of operating the company's corporate jet) and selling and customer support expenses of $1,888,800 (including 5% sales commissions and $448,800 of additional costs). The accounting staff determined that the $448,800 of additional selling and customer support expenses related to the following four activity cost pools: Cost per Unit Activity Activity Cost Driver of Activity 1. Sales visits Number of visit days $1,000 2. Product adjustments Number of adjustments 3. Phone and email contacts Number of calls/contacts 100 4. Promotion and entertainment events Number of events 3,000 1,600 Financial and activity data on the five customers follow: Customer . B Quantity of Sales and Support Activity Gross Activity Activity Activity Activity Sales Profit 1 2 3 $11,400,000 $2,280,000 54 6 96 13 8,400,000 1,680,000 63 12 120 12 3,000,000 600,000 57 11 60 10 3,600,000 720,000 18 5 21 7 2,400,000 480.000 18 15 8 $28,800,000 $5,760,000 210 36 312 50 C D E 2 In addition to the above, the sales staff used the corporate jet at a cost of $1,000 per hour for trips to customers as follows: Hours Customer A 9.60 Customer B 19.20 Customer c 4.80 Customer D 0 Customer E 3.00 The total cost of operating the airplane is included in general and administrative expense; none is included in selling and customer support costs. Required a. Prepare a customer profitability analysis for Remington Aeronautics that shows the gross profits less all expenses that can reasonably be assigned to the five customers and the net profit percentage for each customer Note: Round net customer profit percentage to one decimal place (for example, enter 6.4% for .0635555). A B Customer 0 $ 0 $ D E 0 $ 0 $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sales $ Cost of goods Gross profit Less expenses: Sales commissions Sales visits Product adjustments Phone and other remote contacts Promotion and entertainment Corporate jet expense Customer profitability $ Net customer profitability / sales 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0 $ 0 $ 0 0 $ 096 096 0 % 096 0 % b. Now assuming that the remaining general and administrative costs are assigned to the five customers based on relative sales dollars, calculate profit assigned to each customer and the net profit percentage for each customer. Note: Round net customer profitability in dollars to the nearest whole dollar. Note: Round net customer profit percentage to one decimal place (for example, enter 6.4% for .0635555). Customer A B D E 0 $ 0 $ Net customer profitability in dollars $ Net customer profitability / sales 0 $ 0 % 0 $ 0 % 0 096 0 % 0 %
