Roger Wilco Aviation, LTD (RWA), is a British aeronautics subcontract company that designs and manufactures electronic control systems for commercial airlines. The vast majority of all commercial aircraft are manufactured by Boeing in the US and Airbus in Europe; however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that RWA does contract work for the two major manufacturers plus three companies in the second tier.

Because competition is intense in the industry, RWA has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage non-manufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years, RWA’s CEO, Jeff Thompson, 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.

RWA’s non-manufacturing overhead consists of $2.5 million of general and administrative (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 million (including 5% sales commissions and $1,050,000 of additional costs).

The accounting staff determined that the $1,050,000 of additional selling and customer support expenses related to the following four activity cost pools:

Activity	Activity Cost Driver	Cost per unit of Activity
Sales visits	Number of visit days	$1,400
Product adjustments	Number of adjustments	$1,200
Phone and email contacts	Number of calls/contacts	$200
Promotion and entertainment events	Number of events	1,600

Financial and activity data on the five customers follows (Sales and Gross Profit data in millions):

Quantity of Sales and Support Activity
Customer	Sales	Gross Profit	(1)	(2)	(3)	(4)
#1	$17	$3.4	106	23	220	82
#2	12	2.4	130	36	354	66
#3	3	0.6	52	10	180	74
#4	4	0.8	34	6	138	18
#5	3	0.6	16	5	104	10
$39	$7.8	338	80	996	250

In addition to the above, the sales staff used the corporate jet at a cost of $800 per hour for trips to customers as follows:

Customer #1 24 hours

Customer #2 36 hours

Customer #3 5 hours

Customer #4 0 hours

Customer #5 6 hours

The total cost of operating the airplane is included in general and administrative expense; none is included in selling and customer support costs.

Required:

1. Prepare a customer profitability analysis for Roger’s Aeronautics that shows the gross profits after all expenses that can reasonably be assigned to the five customers. You should have Customer Profitability and Customer ROS.
2. Now assuming that the remaining G&A costs are assigned to the five customers based on relative sales dollars, calculate net profit for each customer. You should have Net Customer Profitability and Net Customer ROS.
3. In your executive report, discuss your findings and analysis from parts (a) and (b). What did you learn about customer profitability? How might you manage customer activity and profitability? After allocating the common G&A costs, what insights or issues do you see?

Please note: for an analysis like this, we differentiate between direct fixed costs (that are fixed costs for one and only one department; those costs are traced directly to the department and are usually controllable by the department manager) and common fixed costs (fixed costs that may serve several departments, are not controllable by the department managers, and are allocated across departments -- many times these costs are related to common headquarters costs).