P 5.49 Customer Profitability analysis Ellie Mosk, CEO of X-Space Industries, decided to expand the company's product offering beyond the core model rocket business. After investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies were interested in having X-Space develop these drones, and financial results, to date, have been encouraging. Revenue was $4 million, gross margins have been running about 40%, and the customer sales and support costs were $1 million. However, there is a growing concem that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability: Activity Cost Driver Total Cost Sales Visits Sales visit days S 486.000,00 Product Modifications Number of modifications s 260.000,00 Phone calls Number of Minutes S 92.000,00 e-mail electronic communicatio Number of Communications S 162.000,00 S 1.000.000.00 Cust Gross Profit Visit Days A B c D E Total $ s $ S $ $ Revenue 400.000,00 $ 500.000,00 $ 600.000,00 S 1.000.000,00 $ 1.500.000,00 $ 4.000.000,00 $ 150.000,00 200.000,00 230.000,00 420.000,00 590.000,00 1.590.000,00 15 25 40 90 100 270 Modifi Phone cation Minutes 15 1.030 15 1.120 40 1.370 60 1.720 70 2.120 200 7360 Electronic Comm 625 875 1.000 2000 2.250 6.750 1 2 Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability, Use ABC to prepare a customer profitability analysis. Compare the results from requirements 1 and 2 above. What are some strategic implications for management? 3