Question 2 Tropical Drinks Ltd was established less than three years ago by two young entrepreneurs. The company markets and sells organic guava juice sourced from sustainable farms located in various parts of Southeast Asia. Tropical Drinks buys fresh guava juice in large volumes from these farms at an average cost of 0.40 per litre. Further costs to re-package the juice into ready-to-drink 500ml (i.e., half a litre) cartons amount to 0.15 per carton. Each 500ml carton carries a list selling price of 0.90 but Tropical Drinks offers price discounts to some of its key customers. Tropical Drinks Ltd has been facing intense competition in the market lately and believes that it is important to develop a long-standing relationship with the customers and suppliers. The company has recently adopted the Activity-based costing (ABC) system and would like to use the cost information to analyse the relative profitability of their biggest customers. The company has hired you as a consultant to offer advice and provided you with the following information: Number of cartons sold (500mL each) List selling price (per carton) Actual selling price (per carton) Number of purchase orders Number of sales visits Number of deliveries Miles travelled per delivery Number of expedited deliveries Smartshop 20,000 0.90 0.75 15 10 Customer Alldays 48,000 0.90 0.85 16 6 18 25 2 Bigmart 75,000 0.90 0.65 10 12 15 40 5 22 20 7 Activity Processing customer orders Sales visits Delivery vehicles Product handling Expedited deliveries Cost driver and rate 225 per purchase order 175 per sales visit 3.50 per delivery mile travelled 0.02 per carton sold 195 per expedited delivery Required a) Prepare a customer profitability analysis (CPA) of the three largest customers of Tropical Drinks Ltd. (7 marks) b) Based on your analysis in part a), make recommendations for improving the profitability of Tropical Drinks Ltd. (Maximum 250 words). (13 marks) c) Customer profitability analysis (CPA) is often claimed to be a 'strategic management accounting (SMA) technique. Explain how the features of CPA differentiate it from more traditional costing techniques and contribute towards the strategic management of companies. Use examples drawn from Tropical Drinks Ltd to illustrate your answer. (Maximum 250 words). (13 marks) Total 33 marks