Question 3 Good Life Ltd is a Hong Kong based company which produces a variety of kitchen appliances for many markets. The company is well known for its product quality, innovation and service. Caf Engine, a small coffee machine which makes a sound like a train engine while the coffee is brewing, is an innovative product which brings fun to home coffee making. Caf Engine is sold exclusively to three retail chains; Sunny, Dennis and Merryland; at HK$350 per unit. Each Caf Engine has a variable cost at HK$170 per unit. The sales of the Caf Engine have grown rapidly since the product was launched two years ago. However, the success of Caf Engine has quickly attracted competition from other producers who are now offering similar, but cheaper, products. The senior management of Good Life Ltd has realised that the price of Caf Engine needs to come down in order to remain competitive. A review of the costs of supplying Caf Engine to the three retail chains in 2020 has just been conducted and the initial findings are shown below. Sunny Dennis Merryland 60,000 8% 100,000 5% 80,000 7% Units of Caf Engine sold Trade discount given to customers (based on sales value) Number of orders received Number of deliveries made Average miles travelled per delivery Number of telephone enquiries Number of customer complaints received Number of sales visits made 3500 4000 80 2400 300 1500 4000 80 3000 150 1500 4000 40 1600 350 420 220 360 Activity Order taking and handling costs Delivery costs Telephone enquiry costs Customer complaint handling costs Sales visit costs Total activity costs In HK$ 3,250,000 4,000,000 350,000 2,160,000 800,000 Required: a) Prepare a customer profitability statement for 2020 which clearly shows: i. The total profit per customer group for the year. ii. The profit per unit of Caf Engine sold to each customer group. All relevant workings, including the calculations of cost driver rates and the assumptions made, must be clearly shown in order to gain the maximum marks. (15 marks) b) Based on your answers to (a) above, analyse the performance of each of the customer groups and advise the managers of Good Life Ltd on the key factors that they should consider when renewing the sales and service contracts with the three customers for the sales of Caf Engine in the next financial year. You are recommended to analyse each customer separately. You should ensure that any suggestions you make as to how Good Life Ltd manages and services its customers are specific and practical to the company. Word count guidance for Part (b): 300 - 350 words (10 marks)
