P6-33. Customer Profitability Analysis Remington Aeronautics LTD is a British aeronautics subcontract company that designs and manufac- tures electronic control systems for commercial airlines. The vast majority of all commercial aircraft are manufactured by Boeing in the U.S. and Airbus in Europe, however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that Remington does contract work for the two major manufacturers plus three companies in the second tier. Because competition is intense in the industry, Remington has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage nonmanufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years, Reming- ton Aeronautics' CEO, John Remington, has become concerned that the cost of obtaining contracts and maintaining relations with its five major customers may be getting out of hand. You have been hired to conduct a customer profitability analysis, Remington Aeronautics' nonmanufacturing overhead consists of $2 million of general and admin- istrative (G&A) expense (including, among other expenses, the CEO's salary and bonus and the cost of operating the company's corporate jet) and selling and customer support expenses of $3.15 million (including 5% sales commissions and $750,000 of additional costs). The accounting staff determined that the $750,000 of additional selling and customer support expenses related to the following four activity cost pools: Cost per Unit Activity Activity Cost Driver of Activity 1. Sales visits Number of visit days $1,000 2. Product adjustments. Number of adjustments 1,600 3. Phone and email contacts Number of calls/contacts 100 4. Promotion and entertainment events Number of events 3,000 Financial and activity data on the five customers follow (Sales and Gross Profit data in millions): Quantity of Sales and Support Activity Gross Activity Activity Activity Activity Profit 1 2 3 4 Customer Sales 20 A... B C D E $19 14 5 6 4 $3.8 2.8 1.0 1.2 0.8 90 105 95 30 30 350 co &" +1 811 160 200 100 35 25 520 21 20 17 12 14 84 $48 $9.6 In addition to the above, the sales staff used the corporate jet at a cost of $1,000 per hour for trips to customers as follows: Customer A.. Customer B. Customer C Customer D Customer E. 16 hours 32 hours 8 hours O hours 5 hours The total cost of operating the airplane is included in general and administrative expense; none is in- cluded in selling and customer support costs. Required a. Prepare a customer profitability analysis for Remington Aeronautics that shows the gross profits less all expenses that can reasonably be assigned to the five customers. b. Now assuming that the remaining general and administrative costs are assigned to the five customers based on relative sales dollars, calculate net profit for each customer. c. Discuss the merits of the analysis in part a versus part b
