Hi rmahuja I have a 2 part question that I need help with understanding it. I will upload the 2 problems with the example exhibit.
Problem 1-Customer profitability Analysis Gonalong. Inc. has 10 customers that account for all of its $ 4,200.000 of net income. Its activity-based costing system is able to assign all costs, except for $ 650,000 of general administrative costs, to key activities incurred in connection with serving its customers. A customer profitability analysis based on activity costing produced the following customer profits and losses: Customer #1...........................................................................$306,000 #2............................................................................624, 000 #3........................................................................... (257,000) #4............................................................................. 909,000 #5.............................................................................. 950,000 #6................................................................................872,000 #7.................................................................................598,000 #8..................................................................................322,000 #9....................................................................................(105,000) #10....................................................................................631,000 Total...............................................................................................$4,850,000 Required Prepare a customer profitability profile like the one in Exhibit 18.3 Customer Protability Prole If a company knows the amount of profits (or losses) generated by each of its customers, a customer profitability profile can be prepared similar to the one illustrated in Exhibit 18.3. This hypothetical company has 350 customers and has current total profits of $5 million, but only 200 of its customers are profitable. Cumulative profits reach $7.5 million when the 200th customer is added to the graph, but the 201st through the 350th customers cause cumulative profits to decline to $5 million because they are unprofitable. Once a company has profitability data on each of its customers (or categories of customers), only then can it proceed to try to convert them to profitability, or seek to terminate the relationship with those customers. Just as we saw that ABC provided a model for producing more accurate product cost data, ABC is also a valuable tool for generating customer profitability data. Graph Cumulative T Cumulative Total Graph Cumulative Total https://ereader.mybusinesscourse.com/ ebooks/1055/images/bg36b.png Cumulative Total Total Profits Cumulative Total ProfiTotal Cumulative Total Profits $7.5 million $5 million 0 200 350 Current Total Customer Profits Customers From Most Profitable to Least Profitab Cumulative Total Cumulative Total Profits $7.5 million $5 million 0 200 350 Current Total Customer Profits Customers From Most Profitable to Least Profitable Cumulative Total Profits $7.5 million $5 million 0 200 350 Current Total Customer Profits Customers From Most Profitable to Least Profitable Cumulative Total Profits $7.5 million $5 million 0 200 350 Current Total Customer Profits Customers From Most Profitable to Least Pr Problem 2-Customer Profitability Analysis Refer to problem 1 Gonalong Inc. Required a. If Gonalong were to notify customers 3 and 9 that it will no longer be able to provide them services in the future, will that increase company profits by $ 362,000? Why or Why not? b. B. What is the primary benefit of preparing a customer profitability analysis?
