Perez has two customers: C1 and C2 and sells its products for $500 per unit. The firm's gross margin ratio is 40% of revenues. Perez currently allocates customer support costs at a rate of 18% of revenues. Perez sold 500 units to C1 and sold 1,750 units to C2 in the most recent year.

a. Calculate Operating Income for C1 and C2 using the current allocation method.

b. Perez Corp. has gathered the following ABC rate and activity information:

Calculate Operating Income for C1 and C2 using the ABC method for allocating support costs.

c. Which customer is most important to Perez’s long-term profitability. Explain why this customer is most important.
 

Purchase Orders Deliveries Customer Visits ABC Cost Rate $148 per purchase order $131 per delivery $130 per customer visit C1 Activity 220 180 60 C2 Activity 560 300 125