TAA has produced a profitability analysis based on its three key service lines of Dolphin

Tours, Seal Tours and the Caf & GS. However, for sales and marketing purposes, TAA's customers are segmented into four main groups: School customers, Pre-booked customers (via website, email, or phone), Tour Group customers and Drive-up customers.

Note: TAA managers distinguish between 'customers' and 'guests'. Customers include School customers and Tour Group customers. The individuals that these customers send to TAA are called guests (see Table 4). Pre-booked and Drive-up customers can also be referred to as guests

the Service Line Profitability Analysis (SLPA - see Table 1) was introduced by the Finance Manager.

Table 1 - TAA: Service Line Profitability Analysis
	Seal Tours	Dolphin Tours	Cafe and GS	Total
	$	$	$	$
Revenues	1,200,000	2,268,000	888,000	4,356,000
Direct costs	870,000	1,242,000	594,000	2,706,000
Contribution	330,000	1,026,000	294,000	1,650,000
Contribution margin	27.5%	45.2%	33.1%	37.9%
Overhead costs
Equipment	33,200	123,100	14,700	171,000
Establishment	70,000	87,500	52,500	210,000
Equipment and establishment costs	103,200	210,600	67,200	381,000
Management and adminsitration	210,000	378,000	140,000	728,000
Marketing	40,155	124,845	-	165,000
Total overheads	353,355	713,445	207,200	1,274,000
Net profit	(23,355)	312,555	86,800	376,000
Net profit margin	-1.9%	13.8%	9.8%	8.6%

For Drive-up customers, this is at the standard tour price of $70 per guest for a Dolphin Tour and $100 per guest for a Seal Tour. The direct costs are mainly direct labour costs consisting of the employment costs of tour guides and boat staff. The direct cost of the dolphin tour staff is $250 per tour and the direct cost of the seal tour staff is $200 per tour. Thus, it is relatively easy to calculate direct costs and hence the contribution for the Seal Tour and Dolphin Tour service lines."

"Arriving at the contribution in the Caf and Gift Shop is even easier as we know what revenues

come through the tills and we know the costs of everything we sell (we work on an average

mark up of 100% on cost). Moreover, all direct staff are specific to that area, so we know the

direct labour cost ($150,000 per annum) and hence we can calculate the contribution generated by the Caf and Gift Shop.

Financial manager explains the allocation of overheads next:

"Tour equipment costs include all costs (including depreciation and maintenance) of any of

the specialised equipment used by the tour guides and guests during their tour, including life

jackets, boarding ladders and boat repairs and maintenance. All the equipment costs can be

accurately traced to the tour service lines. Similarly, for the Caf and Gift Shop, the equipment

costs (related to ovens, tills, equipment, etc.) can be specifically traced to the service line."

"Establishment costs relate to the overall costs of running the premises, including building

services, maintenance and insurance. These are traced to each service line based on the floor

area of the rooms (including storage areas) dedicated to Seal Tours, Dolphin Tours and the

Caf and Gift Shop. The costs of any shared areas (like reception) are allocated in the same

overall proportion, on the basis that all service lines benefit from such areas."

"Management and Admin costs relate mainly to the costs associated with sales and marketing

staff and admin staff (including salaries and their office costs). These are a bit tricky to allocate

accurately. The Caf and Gift Shop is relatively easy as they have dedicated management and

admin staff - the manager, James Hector, plus one purchasing clerk - so their costs can be

specifically traced to the service line. Clearly, Sophie's costs are specific to the tour service

lines."

"The remaining Management and Admin costs are then apportioned between the Seal Tour

and Dolphin Tour service lines in proportion to the number of tour staff - the admin staff

always claim to spend more of their time on issues relating to the dolphin tours because there

are more dolphin tour staff asking for their help! Therefore, the remaining Management and

Admin costs are allocated in the proportion of 35.72% to Seal Tours and 64.28% to Dolphin

Tours."

"Finally, the marketing expenditure (mainly advertising) is incurred in large chunks relating

to various advertising initiatives. It is very difficult to accurately trace marketing costs to

service lines and it seems unfair to charge marketing to the Caf and Gift Shop as we mainly

advertise the tours. Therefore, we simply allocate marketing expenditure in proportion to the

contribution of each tour service line."

Manager realised that TAA's activities have become more diverse and complex over the years and yet the costing system has remained relatively simplistic. Maybe TAA needs a more sophisticated costing system that will provide more useful information to managers?

Financial manager quickly agrees that it would be timely to apply what he learned on that activity-based costing (ABC) course. He suggests that he talks to each manager about key activities and cost drivers at TAA and offers to come up with some sort of customer segment profitability analysis (CSPA) for the next meeting.

One week later Mateo proudly presents a CSPA (Table 2) and explains that the principles used in arriving at the contribution are exactly the same as for the SLPA (Table 1), as explained previously.

The only difference is that customer segments are the cost object instead of the service line.

Mateo explains the basic principles of ABC and the ABC methodology he used to trace overheads to customer segments and its ability to produce reliable and accurate customer profitability figures that take all costs into account.

"I've previously explained how the equipment costs were specifically allocated to Seal and

Dolphin service lines. It then makes sense to trace the equipment costs to customer segments

based on usage. That is, the number of guests from each customer segment undertaking each

type of tour."

Table 2 TAA: Tour Customer Segment Protability Aanalysis (CSPA) Tour Group Pre booked Drive up Seal tour revenue Dolphin tour revenue Total tour revenue Seal tour direct costs Dolphin tour direct costs School 33 108,000 193,200 301,200 78,300 105,800 $ 360,000 655,200 1,015,200 261,000 358,800 $ 600,000 1,260,000 1,860,000 435,000 690,000 $ 132,000 159,600 291,600 95 ,700 87,400 Total $ 1,200,000 2,268,000 3,468,000 870,000 1,242,000 Total direct costs Seal tour c ontribution Do mhin tour contribution Total tour common Contribution margin % Overhead costs Equip & establishment - Seal Equip & establishment - Dolphin Customer relationship management Customer administration Specific marketing General marketing Total overhead costs Net prot or loss for Tours Related net profit for Cafe & GS Customer segment prot or loss Customer Prot Margin 184,100 29,700 87,400 117,100 38.9% 148,788 (31,688) 7,507 619,800 99,000 296,400 395,400 38.9% 91,800 109,800 64,800 55,000 19,440 340,840 54,560 25,336 1,125,000 165,000 570,000 735,000 39.5% 51,600 117,000 168,600 183,000 120,000 20,000 36,000 527,600 20 7,400 46,919 183,100 36,300 72,200 108,500 37.2% 26,172 18,000 0 5 ,400 49,5 72 58,928 7,038 2,112,000 330,000 1,026,000 1,356,000 39.1% 103,200 210,600 313,800 366,000 222,000 98,400 66,600 1,066,800 289,200 86,800 (24,181) -8.0% 79,896 7.9% 254,319 13.7% 65,966 22.6% 376,000 10.8% Table 3: ctivites and activity rate for CSPt Activity cost Cost driver Number of Activity lburden] transactions rate S $ Equipment and Establishment Dolphin tours 210,600 Number of dolphin tour guests 32,400 6.50 Seal tours 103,200 Number of seal tourguests 12,000 8.60 Total 313,800 44,400 Management and administration fexciaa'ing Cafe & GS) Customer relationship management 366,000 CRM days 400 915.00 Customer administration 222,000 Number of guests 44,400 5.00 Total 500,000 44,000 Marketing Specific 98,400 Not applicable Specific allocation to segment General 66,600 Number of guests 44,400 1.50 Total 165,000 Table 4: Data on number of transactions by customer segment School Tour Group Prebooked Driveup Number of customers 20 30 24,000 3,600 CRM days 80 120 200 Number of dolphin tour guests 2,760 9,360 18,000 2,280 Number of seal tour guests 1,080 3,600 6,000 1,320 Total number of guests 3,840 12,960 24,000 3,600 Total 27,650 400 32,400 12,000 44,400