Seminar Exercise 2 AquaDrench: Customer Profitability Analysis (CPA) PART A: AquaDrench CPA analysis (based on sales) AquaDrench manufactures water pistols for sale in leading toy retailers. By far their most popular model is the 'Amphitrite'. The product features of this model include a 10 litre water storage capacity (this is strapped to the user's back) and an automatic rapid fire option for pure drenching power. AquaDrench also produces a second model, the 'Poseidon', which is reputed to be the longest shooting water pistol on the market. The price (wholesale price to the toy stores) and cost of goods sold per unit for each of these products are as follows: Amphitrite Poseidon Price per unit $100 $50 Cost of goods sold per unit 60 40 Gross profit per unit $40 $10 In addition, the company incurs customer-related selling & general admin. (SG&A) expenses of $450,000. The company wishes to assign these costs to its three major retail customers, Tru Kids, Toyworld, and Kidstuffs. The annual sales volumes to these customers (in units) are: Retailer Amphitrite Poseidon Sales Volume Sales Volume Tru Kids 9,500 5,000 Toyworld 10,000 7,000 Kidstuffs 4,500 4,500 Required: Prepare a report showing the relative profitability of each customer, allocating customer- related expenses based on sales dollars. Compare the relative contribution of each customer to gross profit before and after the allocation of customer-related expenses (as a percentage of the total amount). How would you rank these customers based on this report? Key Answers: Tru Kids Toyworld Kidstuffs Total Net customer profitability $262,558 $281,628 $130,814 $675,000PART B: AquaDrench CPA analysis (using activity-based information) Further analysis has revealed that the customer-related expenses ($450,000) are related to three major activities: customer service, sales order processing (the retailers manually order stock as and when they require it), and advertising support. The advertising support is in the form of advertisements that are placed by AquaDrench to support the retailer's further sale of AquaDrench products to consumers. The full-time equivalents (FTE) and activity drivers associated with these activities are: FTE* Activity Driver Customer Service 50 No. of Service Requests Sales Order Processing 40 No. of Sales Orders Advertising Support 10 No. of Ads Placed Total 100 [Note*: Full Time Equivalent is a measure of the effective number of full-time labour resource allocated, based on total full time and fractional (casual and part time) labour used for each activity] Toyworld requires extensive support in the form of sales order processing (orders are received from each individual store rather than from a central point of contact) service, and advertising support, as can be seen from the following activity information: Tru Kids Toyworld Kidstuffs Total Number of Service Requests 10 55 185 250 Number of Sales Orders 12 48 90 150 Number of Ads Placed 20 50 130 200 Required (a) Prepare a customer profitability report using the activity-based information. (b) How does your assessment of profitability differ from the previous report? (c) If the relative profitability of the three major customers has changed, why is that the case? (d) What recommendations would you make regarding the management of each of these three customers? Key Answers: Tru Kids Toyworld Kidstuffs Total Net customer profitability $402, 100 $351,650 $(78,750) $675,000
