Question
Minnesota Manufacturing makes a component called Upper B2040. This component is manufactured only when ordered by a customer, so Mississippi keeps no inventory of Upper
Minnesota Manufacturing makes a component called Upper B2040. This component is manufactured only when ordered by a customer, so Mississippi keeps no inventory of Upper B2040. The list price is $114 per unit, but customers who place "large" orders receive a 14% discount on price. The customers are manufacturing firms. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of 10. If the component needs to be exchanged or repaired, customers can come back within 14 days for free exchange or repair.
information about Minnesota's five biggest customers follows:
| Customer | ||||
| A | B | C | D | E |
Number of units purchased | 5,200 | 1,200 | 600 | 4,800 | 8,900 |
Discounts given | 14% | 14% | 0% | 14% | 14% on half the units |
Number of orders | 6 | 18 | 54 | 30 | 24 |
Number of cases | 580 | 150 | 110 | 450 | 830 |
Number of rush orders | 5 | 5 | 2 | 0 | 11 |
Number of units exchanged/repaired | 15 | 100 | 11 | 70 | 260 |
All customers except E ordered units in the same order size. Customer E's order quantity varied, so E got a discount part of the time but not all the time.
The full cost of manufacturing a unit of Upper B2040 is $ 88. In addition, Minnesota incurs customer-level costs. Customer-level cost-driver rates are:
Order taking | $300 per order |
Product handling | $14 per case |
Rush-order processing | $590 per rush order |
Exchange and repair costs | $70 per unit |
Requirement:
1. Calculate the customer-level operating income for these five customers. Use the format provided. Prepare a customer-profitability analysis by ranking the customers from most to least profitable.
Begin by calculating the customer-level operating income for these five customers. (For accounts with a $0 balance, make sure to enter "0" in the appropriate cell. Use parentheses or a minus sign when entering operating losses.)
| A | B | C | D | E |
Revenues at list price |
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Price discounts |
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| 0 |
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Revenues at actual prices |
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Cost of goods sold |
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Gross margin |
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2. Discuss the results of your customer-profitability analysis. Does Minnesota have unprofitable customers? Is there anything Minnesota should do differently with its five customers?
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