Remington Aeronautics LTD 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 U.S. and Airbus in Europe; however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that Remington does contract work for the two major manufacturers plus three companies in the second tier.

Because competition is intense in the industry, Remington 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 and acceptable net profit margin. With declining profit margins in recent years, Remington Aeronautics CEO, John Remington, has become concerned that the costs of obtaining contracts and maintain relations with its five major customers may be getting out of hand. You have been hired to conduct a customer profitability analysis.

Remington Aeronautics non-manufacturing overhead consist of $2.5 million of general and administrative (G&A) expense (including, among other expenses, the CEOs salary and bonus and the cost of operating the companys 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	Cost Driver	Cost per Unit of Activity
1	Sales Visit	Number of visits	$1,400
2	Product adjustment	Number of adjustments	$1,200
3	Phone and email contacts	Number of calls/contacts	$200
4	Promotion and entertainment events	Number of events	$1,600

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

		Quantity of Sales and Support Activity
Customer	Sales	Gross Profit	Activity 1	Activity 2	Activity 3	Activity 4
A	17	3.4	106	23	220	82
B	12	2.4	130	36	354	66
C	3	.6	52	10	180	74
D	4	.8	34	6	138	18
E	3	.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 the customers as follows:

Customer A	24 hours
Customer B	36 hours
Customer C	5 hours
Customer D	0 hours
Customer E	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

a. Prepare a customer profitability analysis for Rogers Aeronautics that shows the gross profits less all expenses that can reasonably be assigned to the five customers

b. Now assuming that the remaining general and administrative costs are assigned to the five customers based on relative sales dollars, calculate net profit for each customer.

c. Discuss the merits of the analysis in part a, versus part b.