Customer Profitability Analysis Rogers 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 Rogers does contract work for the two major manufacturers plus three companies in the second tier Because competition is intense in the industry, Rogers has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage non-manufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years, Rogers Aeronautics' CEO, Len Rogers, 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. Rogers Aeronautics' non-manufacturing overhead consists of $2.5 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 $3 million (including 596 sales commissions and $1,050,000 of additional costs). The accounting staff determined that the $1,050,000 of additional selling and customer support expenses related to the following four activity cost pools: Activity 1. Sales visits 2. Product adjustments 3. Phone and email contacts 4. Promotion and entertainment events Activity Cost Driver Cost per Unit of Activity Number of visit days Number of adjustments Number of calls/contacts Number of events $1,200 1,500 150 1,500 Financial and activity data on the five customers follows (Sales and Gross Profit data in millions): Quantity of Sales and Support Activity Customer Sales Gross Profit Activity 1 Activity 2 Activity 3 Activity 4 $17.00 12.00 3.00 4.00 3.00 539.00 106 130 52 34 16 220 354 180 S3.40 82 2.40 36 0.80 0.60 $7.80 5104 10 80 996 250 In addition to the above, the sales staff used the corporate jet at a cost of $800 per hour for trips to customers as follows: Customer #1 24 hours Customer #2 36 hours Customer #3 5 hours Customer #4 0 hours Customer #5 6 hours The total cost of operating the airplane is included in general and administrative expense; none is included in selling and customer support costs