Question
Original Paper Delivery has decided to analyze the profitability of five new customers. It buys recycled paper at $13 per case and sells to retail
Original Paper Delivery has decided to analyze the profitability of five new customers. It buys recycled paper at $13 per case and sells to retail customers at a list price of $18 per case. Data pertaining to the five customers are as follows:
Customer
1 2 3 4 5
Cases sold 2,050 8,820 45,000 34,700 2,350
List selling price $18 $18 $18 $18 $18
Actual selling price $18 $17.65 $15.40 $17.46 $16.53
Number of purchase orders 13 23 36 12 41
Number of customer visits 3 2 13 2 10
Number of deliveries 15 33 66 21 41
Miles traveled per delivery 15 8 9 10 41
Number of expedited deliveries 0 0 0 0 1
Original Paper Delivery's five activities and their cost drivers are:
Activity | Cost Driver Rate |
Order taking | $150 per purchase order |
Customer visits | $80 per customer visit |
Deliveries | $2 per delivery mile traveled |
Product handling | $0.80 per case sold |
Expedited deliveries | $320 per expedited delivery |
Requirements
1. | Compute the customer-level operating income of each of the five retail customers now being examined (1, 2, 3, 4, and 5). Comment on the results. |
2. | What insights do managers gain by reporting both the list selling price and the actual selling price for each customer? |
3. | What factors should managers consider in deciding whether to drop one or more of the five customers? |
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