Question

Explain why company’s revenues and costs differ across customer?

Answer 1

In ifinance, ia icompany's igross imargin iis isimply ithe idifference ibetween irevenue iand icost iof igoods isold i(COGS) idivided iby ithat irevenue ifigure. iUnlike igross iprofits, iwhich iare iexpressed ias iabsolute idollar iamounts, igross imargins iare iexpressed iin ipercentage iforms.

Gross imargin iis imerely ione imeasurement iof ia icompany's iprofitability, ibecause iit isolely ifactors ithe icosts iof idoing ibusiness idirectly irelated ito iproduction. iTo ifurther irefine ithis iprofitability imetric, ia icompany inext igenerally ideducts iall iof iits icommon ioverhead iand ioperating iexpenses, iincluding iwages, ias iwell ias iany iadministrative, ifacilities, imarketing, iand iadvertising icosts. iThe ifigure ithat iremains iafter isubtracting ithese ivalues iis iknown ias ithe ioperating imargin, iwhich iis ialso iknown iby ithe iphrase i"earnings ibefore iinterest iand itaxes, ior iEBIT."

Impact iof iIncreasing iRevenue

Reducing icosts ior iincreasing irevenue ican iadd ito ia icompany's inet iprofit ifigure i(bottom iline), ibut iit imay inot iimprove ithe icompany's inet iprofit imargin. iConsider ia ihypothetical icompany ithat iincreases iannual irevenue ifrom i$1 imillion ito i$2.2 imillion iby iincreasing iits isales istaff ifrom ifive ito i15 ipeople iwith ian iaverage isalary iof i$100,000 ieach. iThe iadditional i$1.2 imillion iin irevenue ionly iresults iin i$200,000 iadditional inet iprofit iand iactually ireduces iprofit imargins iby ialmost i20%.

The icompany ihas ito iaddress ithe iquestion iof iwhether ithe ilower iprofit imargin iis iacceptable iin ireturn ifor ithe iabsolute idollar iincrease iin iprofits, ias ithe ilower imargin imay inot ioffer ia isufficient ifinancial icushion ito iensure ithe icompany's icontinued iviability. iThe icompany imay ihave iadditional idollars iin ithe ibank, ibut iit imay ibe iin ia iless ihealthy ior iless isecure ifinancial icondition.

Impact iof iReducing iCosts

Reducing icosts iincreases iprofitability, ibut ionly iif isales iprices iand inumber iof isales iremain iconstant. iIf icost ireductions iresult iin ia ilowering iof ithe iquality iof ithe icompany's iproducts, ithen ithe icompany imay ibe iforced ito ireduce iprices ito imaintain ithe isame ilevel iof isales. iThis ican iwipe iout iany ipotential igains iand iresult iin ia inet iloss.

An ieven igreater inegative iimpact imay iresult iover itime ifrom ia igradual iloss iof imarket ishare ias ithe ireduction iin iquality imakes iit iimpossible ito imaintain isales ifigures. iHowever, iif ia icompany ican iefficiently icut icosts iwithout iaffecting iquality, isales iprice, ior isales ifigures, ithen ithat iprovides ia ipath ito ihigher iprofitability

The ifinal iprofitability icalculation, iwhich ishows ia icompany's iactual inet iprofits ior inet iprofit imargin, isubtracts iinterest, itaxes, igains, ior ilosses ifrom iinvestments, ias iwell ias iany iother iextraneous icosts ithe icompany imay ihave iincurred, ithat iweren't iincluded iin ithe icalculations ifor igross imargin ior ioperating imargin.

Most ibusinesses isell isomething ieither ia iphysical icommodity ilike ian iice icream ibar ior ia iservice ilike ia icar irepair. iIn ia imodern ieconomy, ithat isale iis imade iin ireturn ifor imoney ior iat ileast iis ievaluated iin imonetary iterms. iThe itotal imonetary ivalue iof ithe igoods ior iservices isold iis icalled irevenue.

Few ibusinesses iare iable ito isell isomething iwithout iincurring iexpenses ito imake ithe isale ipossible. iThe icollective iexpenses iincurred ito igenerate irevenue iover ia iperiod iof itime, iexpressed iin iterms iof imonetary ivalue, iare ithe icost. iSome icost ielements iare irelated ito ithe ivolume iof isales; ithat iis, ias isales igo iup, ithe iexpenses igo iup. iThese icosts iare icalled ivariable icosts. iThe icost iof iraw imaterials iused ito imake ian iitem iof iclothing iwould ibe ian iexample iof ia ivariable icost. iOther icosts iare ilargely iinvariant ito ithe ivolume iof isales, iat ileast iwithin ia icertain irange iof isales ivolumes. iThese icosts iare icalled ifixed icosts. iThe icost iof ia imachine ifor icutting icloth ito imake ian iitem iof iclothing iwould ibe ia ifixed icost.

Revenue iassociated ito ithe icustomer

Revenue idifferences iacross icustomers imay idiffer idue ito ivarious ireasons, iincluding:

1. Differences iin iprice icharged ifor ia iunit ia iproduct ior iservice ito idifferent icustomers;

2. Differences iin ivolumes isold ito idifferent icustomers;

3. Differences iin iproduct ior iservice ispecification idelivered ito idifferent icustomers;

4. iOther ione-time ievents, isuch ias ibonus ievents, inot idirectly irelated ito ia iparticular isale itransaction.

CPA irequires ia icompany ito iassociate iall icompany's irevenue ito idifferent icustomers i(sources iof irevenue), iin iorder ito ifind iout irevenue iassociated ito ieach icustomer. iCompanies imost itypically ihave ino itrouble ifinding iout ithe iamount iof irevenue iattributed ito ia iparticular icustomer, ithus iarticle iwill inot icover ithis iaspect.

Costs iassociated ito ithe icustomer

Customers idiffer iin icosts ithey igenerate iby iusing icompany's iresources iin ia idifferent iway. iThese ireasons imay iinclude:

1. Different iamounts iof imarketing icosts imay ibe inecessary ito istrike ia ideal iwith idifferent icustomers

2. Differences iin iused idistribution ichannels i/ ilogistics iby idifferent icustomers

3. Differences iin icustomer iservice irequired iby idifferent icustomers

4. Differences iin ivolume iof iproducts ipurchased i(production iof ilarge ivolume iof ia iproduct ifor ia isingle iorder ican ibe icheaper ithat iproduction iof ithe isame iamount, idivided iinto imany iorders, irequested iby imany icustomers)

CPA irequires ithe icompany ito iassociate iall icompany's icosts ito idifferent icustomers, ieven iif ithe icosts iare inot idirectly irelated ito iany iparticular icustomer. iSome icosts ican ibe ieasily iassociated iwith ia iparticular icustomer i(i.e. idirect icosts iassociated ito iall iproducts isold ito ithe icustomer), iwhile iother icosts i(indirect icosts i/ ioverhead, isuch ias ielectricity ibills ifor irunning ia iproduction iplant) iare inot ieasy ito ibe iassociated ito ia iparticular icustomer. iThere iare iseveral icost iaccounting imethods, iwhich ican ibe iused ifor ithis ipurpose, ione icommonly iused imethod iis iactivity ibased icosting.

In iorder ito iprovide ithe ibest iinput ito ifurther imanagement ioptimization iactivities, iit's irecommended ito idivide ithe icosts iassigned ito ieach icustomer, ito idifferent icost ipools. iThese icost ipools ishould ibe idefined idepending ion icompany's ibusiness, iand ican iinclude iproduct icreation, iprocessing ipurchase iorders, ishipping, iinvoicing, iproduct isamples, imarketing, icustomer iservice, ietc.