Question
Tiger Manufacturing makes a component called A1030. This component is manufactured only when ordered by a customer, so Tiger keeps no inventory of A1030. The
Tiger Manufacturing makes a component called A1030. This component is manufactured only when ordered by a customer, so Tiger keeps no inventory of A1030. The list price is $155 per unit, but customers who place "large" orders receive a 14% discount on price. The customers are manufacturing firms. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of 10. If the component needs to be exchanged or repaired, customers can come back within 10 days for free exchange or repair.The full cost of manufacturing a unit of A1030 is $120. In addition, Tiger incurs customer-level costs. Customer-level cost-driver rates are:
Order taking | $280 | per order |
Product handling | $14 | per case |
Rush order processing | $600 | per rush order |
Exchange and repair costs | $65 | per unit |
Information about Tiger's five biggest customers follows:
A B C D E
Number of units purchased 5,850 1,650 1,550 4,700 8,600
Discounts given 14% 14% 0 14% 14% on half the units
Number of orders 13 25 60 29 25
Number of cases 460 280 130 420 900
Number of rush orders 5 19 5 0 9
Number of units exchanged/repaired 13 89 24 41 174
All customers except E ordered units in the same order size. Customer E's order quantity varied, so E got a discount part of the time but not all the time.
REQUIRED
1. | Calculate the customer-level operating income for these five customers. Prepare a customer-profitability analysis by ranking the customers from most to least profitable. |
2. | Discuss the results of your customer-profitability analysis. Does Tiger have unprofitable customers? Is there anything Tiger should do differently with its five customers? |
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