Ruiz Wholesalers operates at capacity and sells furniture items to four department-store chains (customers). Mr. Ruiz commented, "We apply ABC to determine product-line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability as well." Ruiz Wholesalers sends catalogs to corporate purchasing departments on a monthly basis. The customers are entitled to return unsold merchandise within a 6-month period from the purchase date and receive a full purchase price refund. The following data were collected from last year's operations and Ruiz has calculated the following activity rates:

Chain

Chain
	1	2	3	4
Gross sales	$45,000	$35,000	$120,000	$80,000
Sales returns: Number of items	107	41	55	51
Sales returns: Amount	$9,000	$5,500	$8,400	$7,000
Number of orders: Regular	35	155	60	80
Number of orders: Rush	9	52	15	35

Data table

Dialog content starts

Activity	Cost-Driver Rate
Regular order processing	$22 per regular order
Rush order processing	$110 per rush order
Returned items processing	$10 per item
Catalogs and customer support	$1,400 per customer

Customers pay the transportation costs. The cost of goods sold averages

80%

of net sales.

Requirement

Determine the contribution to profit from each customer last year. Comment on your solution.

Begin by completing the statement through gross margin for each chain. Then calculate the customer related costs and the contribution margin (loss) for each chain. (Round your answers to the nearest whole number. Use parentheses or a minus sign when entering a contribution loss.)

Chain	1
Gross sales	45000
Sales returns	9000
Net sales	36000
Cost of goods sold
Gross margin

2

35000

5500

29500

3

120000

8400

111600

4

80000

7000

73000

Customer related costs:
Regular orders	22
Rush orders	110
Returned items	10
Catalogs and customer support	1400
Customer related costs
Contribution margin (loss)

Determine the formula to calculate the contribution margin (loss) percentage for each chain.

=

Contribution margin (loss) percentage

Now calculate the contribution margin percentage for each chain. (Round your answers to two decimal places, in the format X.XX. Use parentheses or a minus sign when entering a contribution loss.)

Chain	1		2		3		4
Contribution margin (loss) %		%		%		%		%

Comment on your solution.

The analysis indicates that customers' profitability (loss) contribution

is consistent between customers

varies widely

. This is due to the

cost of goods sold percent

customer-related costs

sales return dollar volume

sales volume

.

Immediate attention to

Chain 1

Chain 2

Chain 3

Chain 4

is required which is currently showing a

high contribution

loss

. The chain has a disproportionate number of

both regular and rush orders

regular orders

returns

rush order

.

Ruiz

should work with the management of

Chain 1

Chain 2

Chain 3

Chain 4

to find ways to reduce the

cost of goods sold

number of orders

number of returns

sales volume

, while maintaining or increasing the

number of orders

number of returns

sales volume

.