Question 3: Managing Customer relation (marks 20)

Max Weber was surprised to find that the profitability of the small local electric retailer market segment to the NBD ltd was much less than expected after the customer-service costs had been allocated. He was unsure whether the customer-profitability analyses meant that NBD Ltd should consider quitting the small local electrical retailer market segment and direct its efforts to the remaining two segments. However, Ivin Flock, the marketing manager for the division, holds different opinion and he believes that the small local electrical retailer market segment should still be serviced by the NBD Ltd. Apart from obvious strategic reasons (e.g., maintaining a strong product profile in all markets), he believes that a more-detailed analysis of the small local electrical retail market segment may reveal quite adequate returns being generated from sales made to some individual electrical retailers.

Tom Stanton, the assistance management accountant for the NBD Ltd, decides to use the Activity-Based Costing (ABC) data to further examine the profitability of individual customers in the small electrical retailers (R. V Boss and N. V Tott). The following data for these two customers for the year ending 31 December is extracted from the NBDs record.

Table 1. Shows ABC customer service indirect cost pools, driver transactions, sales revenue and cost of goods sold for R. V. Boss and N.V. Tott.

Details	R.V. Boss	N.V. Tott
Total order processed	45	30
Average number of line items per order	10	15
Total number of deliveries	30	30
Average number of cartons/pallet shipped per delivery	8	4
Customer relation hours	0	6
Total sales revenue	$30,000	12,000
Total costs of sales	55% of sales revenue	62.5% of sales revenue

The assistant manager then decides to complete the customer-profitability analyses for all the individual customers within the small local electrical retailer market segment and ranks them on the basis of their dollar contribution to the divisions profit. The cumulative net margin for the top 20 per cent of local electrical retailer market segment for the year ending 31 December is a profit of $180,000. The assistant manager provided data relating to the allocation of Customer service indirect costs for R.V. Boss and N. V. Tott, which is as follows:

Table 2. Customer service costs for R.V. Boss and N.V. Tott.

Cost pool	Cost driver transaction
Order processing	$50.00 per order
Line item ordering	$4.00 per line item ordering
Distribution	$100 per delivery
Cartons/pallets shipped	$5.00 per carton/pallet
Customer relations	$200 per hour

Required:

1. Allocate the customer service cost to R.V. Boss and N.V. Tott. You must show your calculations. (6 marks)
2. Calculate the net margin for R.V. Boss and N.V. Tott in dollar and in % of sale. (6 marks)
3. Identify and describe two strategies that could be recommended to the NBD Ltd for managing its relationship with individual customers. (8 marks)