Johnson Beverage sells Sports Drinks to Retail store customers - about 20 customers Last year Revenue was $12 million - Sell Sport Drinks (Exhibit 1 Customer Profitability) This is a report that is produced at may companies. Companies want to see which companies they sell to result in the most profit. Many accounting software have a report like this built in. Below is this report for Johnson Beverage Inc (JBI) Johnson Beverage is profitable but they want to know which of the companies they sell to brings them the most profit as a percentage Four companies are shown below and then the total for the other 16 customers. The way the report is done now shows that they make the best profit from selling to Midwellon or downtown Retail. Johnson knows the price they charge each customer and the cost of Goods is the same per case for all customers. (See Exhibit 2 below) The Customer Service costs are the unknown per customer, like Overhead. Customer Service costs are Johnson's Costs, they do not charge the customers for these costs. On this report they are calculated as a percent of revenue, 10%. Is this right? Or are some customers really costing Johnson more. Saver Superstore Oscars Odd Lots Net Revenue $1,168,000 $1,192,000 Midwellon $121,520 Downtown Retail Others Total JBI $454,500 $9,063,980 $12,000,000 Cost of Goods Sold 1,048,000 1,048,000 104,800 393,000 7,886,200 10,480,000 Gross Profit 120,000 144,000 16,720 61,500 1,177,780 1,520,000 Customer Service Costs 116,800 119,200 12,152 45,450 906,398 1,200,000 Customer Profit 3,200 24,800 4,568 16,050 271,382 320,000 Profit % 0.3% 2.1% 3.8% 3.5% 3.0% 2.7% List price is $15.20 per case Cost is $13.10 per case Discounts vary by customer (Exhibit 2 Customer information) Saver Oscars Superstore Odd Lots Price per Case $ 14.60 $ 14.90 $ Midwellon 15.19 Downtown Retail $ 15.15 Others $ Total JBI Number of Cases Number of Orders Number of Deliveries 80,000 16 80,000 8,000 30,000 15.06 602,000 $ 15.00 800,000 40 20 30 394 500 110 400 200 230 3,540 4,480 44800 Miles per Delivery Expedited Deliveries Sales Visits 5 19 11 4 10 10 250 130 90 12 25 18 9 2,020 296 2,500 360 Customer Saver Superstore is not happy - they think they are paying too much In addition to COGS Johnson has Customer Service costs of $1.2 million per year - like overhead See Table 1 Currently allocated based on % of revenue They Run a report of Profitability by Customer See Exhibit 1 Can you help them using Activity Based costing? Customer Service Cost Detail Product Handling Taking Orders from Customers Delivering the Product Expediting Deliveries Sales visits Total Cost $ 672,000 100,000 140,000 198,000 90,000 $ 1,200,000