Question

Wizard Corporation has analyzed their customer and order handling data for the past year and has determined the following costs:

Order processing cost per order $7

Additional costs if order must be expedited (rushed) $8.00

Customer technical support calls (per call) $12

Relationship management costs (per customer per year) $1200

In addition to these costs, product costs amount to 75% of Sales.

In the prior year, Wizard had the following experience with one of its customers, Chester Company:

Sales $15,500

Number of orders 160

Percent of orders marked rush 70%

Calls to technical support 80

Required: Calculate the profitability of the Chester Company account.

Answer 1

According to the question,

The total sales of the company is $15,500

The cost of the product = 75% of Sales = $11,625

Let us now calculate other costs:-

1. Total cost of order processing

= No. of orders * cost of processing per order

= 160 * $7

= $1,120

2. Total additional costs if order must be expedited

= No. of orders expedited * Additional cost

Here, no of orders expedited = 70% of total orders = 70% * 160 = 112 orders.

Hence, total cost of rushed orders

= 112 * $8

= $896

3. Cost of customer technical support calls

= No. of calls * Cost per call

= 80 * $12

= $960

4. Relationship management cost

= $1,200

Adding up all costs calculated in 1, 2, 3 and 4:-

$1,120 + $896 + $960 + $1,200

= $4,176

We know that,

Total Profit = Total Income - Total Expenses

Here, total expenses include cost of product and other costs.

Hence, Total Profit = $15,500 - $11,625 - $4,176

= -$301

Formula for profitability = Profit / Sales * 100

= -$301 / $15,500 *100

= -1.94%