Question
XYZ has 5 customers that account for all of its $20,000,000 in sales. Its activity-based costing system can allocate all costs to the key activities
XYZ has 5 customers that account for all of its $20,000,000 in sales. Its activity-based costing system can allocate all costs to the key activities incurred in relation to serving its customers, except for $2,000,000 in general and administrative expenses that include, for example, the CEO's salary and bonus.
With profit margins decreasing in recent years, XYZ's CEO is concerned that the cost of obtaining contracts and maintaining relationships with its top five customers may be getting out of control. You have been hired to perform a profitability analysis of the 5 customers.
The first cost associated with customers is the 5% commission paid to sellers based on each customer's total sales.
The rest of the customer service expenses are related to the following five activities:
Activity | Total Cost | Cost Driver | Total Activity |
Customer visits | $350,000 | # of visits | 350 visits |
Product adjustments per customer requests | $96,000 | # of adjustments | 60 adjustments |
Contact by email or phone | $52,000 | # of contacts | 520 contacts |
Promotion events | $252,000 | # of events | 84 events |
Use of corporate jet to visit customers | $61,000 | # flight hours | 61 flight hours |
This is the sales information related to the 5 customers:
Customer | Sales | Cogs |
ABC, Inc. | $5,500,000 | $4,180,000 |
WAAC, Corp | $4,000,000 | $3,040,000 |
Corporation TAC | $3,900,000 | $2,964,000 |
XZS, Co. | $3,500,000 | $2,660,000 |
AAA,LLC | $3,100,000 | $2,356,000 |
REQUIRED
1. Show a table of profitability analysis of the 5 customers that shows gross profits minus all other expenses that can be directly assigned to the five customers.
2. Rank the 5 customers from most profitable to least profitable. Explain if customers with higher sales (purchases) are always the most profitable.
3. What is the main benefit of preparing a customer profitability analysis?
4. Based on your results, what recommendations would you give to XYZ's CEO?
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