Dropping a customer, activity-based costing, ethics. Justin Anders is the management accountant for Carey Restaurant Supply (CRS). Sara Brinkley, the CRS sales manager, and Justin are meeting to discuss the profitability of one of the customers, Donnellys Pizza. Justin hands Sara the following analysis of Donnellys activity during the last quarter, taken from CRSs activity-based costing system: Sara looks at the report and remarks, Im glad to see all my hard work is paying off with Donnellys. Sales have gone up 10% over the previous quarter! Justin replies, Increased sales are great, but Im worried about Donnellys margin, Sara. We were showing a profit with Donnellys at the lower sales level, but now were showing a loss. Gross margin percentage this quarter was 40%, down five percentage points from the prior quarter. Im afraid that corporate will push hard to drop them as a customer if things dont turn around. Thats crazy, Sara responds. A lot of that overhead for things like order processing, deliveries, and sales calls would just be allocated to other customers if we dropped Donnellys. This report makes it look like were losing money on Donnellys when were not. In any case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Donnellys is a very good customer. Assume that Sara is partly correct in her assessment of the report. Upon further investigation, it is determined that 10% of the order processing costs and 20% of the delivery costs would not be avoidable if CRS were to drop Donnellys. Would CRS benefit from dropping Donnellys? Show your calculations. Saras bonus is based on meeting sales targets. Based on the preceding information regarding gross margin percentage, what might Sara have done last quarter to meet her target and receive her bonus? How might CRS revise its bonus system to address this? Should Justin rework the numbers? How should he respond to Saras comments about making Donnellys look more profitable?