Funcorp manufactures water pistols for sale in leading toy retailers. By far their most popular model is the 'Terminator'.

The product features of this model include a ten-litre water storage capacity (this is strapped to the user's back) and automatic rapid fire option for pure soaking power. Funcorp also produces a second model, the 'Assassin', which is reputed to be the longest shooting water pistol on the market.

Recently, Giorgio Lawless, the CFO of Funcorp, decides to conduct a thorough customer profitability analysis. Giorgio has provided you with the following information:

The wholesale price of each of the products and the cost of manufacturing them are as follows:

	Terminator	Assassin
Price per unit	$90	$60
Cost of goods sold per unit	50	30
Gross margin per unit	$40	$30

Funcorp has three major retail customers, their annual sales volume (in units) are:

Retailer	Terminator Sales Volume (units)	Assassin Sales Volume (units)
Toys 'R Us	8,000	3,500
World 4 Kids	7,000	4,000
Toyworld	4,000	2,000
	19,000	9,500

*Note: because Toyworld has been a customer with Funcorp for over 10 years, they receive a 5% discount on all purchases.

In addition, the company incurs selling, general and administrative (SG&A) expenses of $500,000, which is related to three customer-driven activities: sales calls (salespeople conducting regular customer visits), sales orders processing (the retailers manually order stock as and when they require it), and advertising support (in the form of Funcorp placing ads to support the retailer's further sale of Funcorp products to consumers). The resource driver, the number of full-time equivalent staff (FTE), and the activity drivers associated with these customer-driven activities are listed as follows:

	Resource Driver No. of FTE Staff	Activity Driver
Sales calls	30	No. of sales visits
Sales Order Processing	12	No. of sales orders
Advertising support	8	No. of ads placed
Total	50

[Note: Recall that full-time equivalent staff refers to the number of full time staff that will represent the existing number of both full time and part time staff. Example: 4 full time and 5 part time staff working a total of 48 hours per day will be equivalent to 6 full time staff working a total of 8 hours per day.Therefore, there is 6 FTE staff.]

	Toys 'R Us	World 4 Kids	Toyworld	Total
Number of sales visits	20	10	120	150
Number of sales orders	20	10	270	300
Number of ads placed	30	15	75	120
Unit Volume (Terminator)	8,000	7,000	4,000	19,000
Unit Volume (Assassin)	3,500	4,000	2,000	9,500

a) Calculate customer profitability for Funcorp using the net revenue approach (i.e., revenue minus discounts given). Prepare a customer profitability statement. (Hint: Using this approach, a customer who contributes 30% of total net sales revenue received by the firm will be allocated 30% of SG&A expenses).

b) After studying your lecture slides and required readings carefully, you decided that the activity-based costing (ABC) approach to analyse customer profitability is more appropriate. Prepare a customer profitability statement.

c) Which of the two approaches is more accurate in allocating SGA costs to the three customer groups? Justify your answer.

d) Based on your answers in part (b), construct a "2X2" matrix graph using the two components of customer profitability. Label the y-axis and x-axis of your graph clearly. Classify these customers either as aggressive customers, cheap customers, passive customers, or savvy customers. Hint: Before you construct the matrix, start by transforming the relevant calculations from CPA into relative percentages.

e) Based on your classification in part (e) and using CPA information, provide recommendations to Funcorp on how it should manage each customer.

f) Based on Mittal et al. (2008) framework on "How to Approach Customer Divestment", discuss the 5 steps Funcorp can use to manage the unprofitable customer identified in part (b). Identify and discuss two types of information (other than the CPA information) that Funcorp should consider when reassessing this relationship.