Question

The Concord Company recently moved to activity-based costing and implemented customer profitability analysis. In doing so, they found that one of their oldest customers, The Mequon Company, is not profitable. The Mequion Company is small and the management of Concord knows they are very reliant on products from Concord and that they can't absorb a significant increase from Concord, which is needed to make them profitable.

1. What would you recommend if you were part of The Concord Company management team?

2. Because of their long relationship, does The Concord Company have a moral obligation to help them staying in business?

Answer 1

1. If I were a part of The Concord Company management team, I would recommend the company to analyze the situation of The Mequon Company.

As we know that this company is dependent on the products from our company, and cannot bear the increase in price demand from our company, we should not put price burden to this company and sell them the products at previous price. In chance for this price should be increased to the companies who have potential to pay them.

So i would recommend to not increase the price for the company and help the company improve its financual position.

2. The Concord Company has no such moral obligation to help the company staying in the business as it solely depends on them whether they want to continue their business with the company or not.

The Concord Company does not have any obligation or any law biding it to help the company staying in business if they are their existing customers. The decision is of the Concord Company, if they wish they will maintain their business with its existing customer if both have agreed on a common point.