Question

Mountain Distribution has decided to analyze the profitability of five new customers. The company has the following​ activities:

Activity	Cost Driver Rate
Order taking	$80 per purchase order
Customer visits	$80 per customer visit
Deliveries	$4.00 per delivery mile travelled
Product handling	$0.85 per case sold
Expedited deliveries	$335 per expedited delivery.

It buys bottled water at ​$12.20 per case and sells to retail customers at a list price of $14.50

per case. Data pertaining to the five customers​ are:

	Customer
	P	Q	R	S	T
Cases sold	2,160	8,820	60,800	31,900	4,200
List selling price	$14.50	$14.50	$14.50	$14.50	$14.50
Actual selling price	$14.50	$14.22	$13.40	$14.02	$13.02
Number of purchase orders	16	26	34	26	34
Number of customer visits	3	5	8	3	5
Number of deliveries	14	28	64	38	30
Miles travelled per delivery	20	5	4	10	48
Number of expedited deliveries	0	0	0	0	3

Requirement

1.	Compute the​ customer-level operating income of each of the five retail customers now being examined​ (P, Q,​ R, S, and​ T). Comment on the results.
2.	What insights are gained by reporting both the list selling price and the actual selling price for each​ customer?
	3. What factors should Mountain Distribution consider in deciding whether to drop one or more of the five​ customers? Requirement 1. Compute the​ customer-level operating income of each of the five retail customers now being examined​ (P, Q,​ R, S, and​ T). Comment on the results. Begin by computing the​ customer-level operating income of each customer. ​(Enter all balances including zero balances. Use parentheses or a minus sign when entering operating losses. Round all answers to the nearest whole​ dollar.) Customer P Q R S T Revenue Cost of goods sold Gross profit Customer-level costs Customer orders Customer visits Delivery vehicle Product handling Expedited runs Customer-level operating income (loss)

Answer 1

1.

Compute the customer-level operating income of each of the five retail customers now being examined​(P, Q,​R, S, and​T). Comment on the results:

Details	Customers
	P	Q	R	S	T
List selling price	$   31,320	$   127,890	$   881,600	$   462,550	$   60,900
Costs:
Purchase cost	$   26,352	$   107,604	$   741,760	$   389,180	$   51,240
Purchase order cost	$     1,280	$      2,080	$       2,720	$       2,080	$     2,720
Customer visiting	$        240	$          400	$          640	$          240	$        400
Delivery cost	$     4,690	$       9,380	$     21,440	$    12,730	$   10,050
Travelling for deliveries	$          80	$            20	$            16	$            40	$        192
Expected delivery cost	$           -	$            -	$            -	$            -	$     1,005
Product handling	$     1,836	$       7,497	$     51,680	$     27,115	$     3,570
Total expenses	$   34,478	$   126,981	$   818,256	$   431,385	$   69,177
Operating income	$    -3,158	$          909	$     63,344	$     31,165	$    -8,277

Ranks are given based on operating income of each customer. I, II, III, IV, V RANKS are given customer R, S, Q, P and T respectively.

It is important to make more sales and reduce costs to Customer P and T to see gains.

2.

It is important to consider only list selling price as clearly mentioned in the question. However, in order to get real figures, actual selling price also considered wherever applicable.

3.

In order to decide whether to drop a customer or continuing is depends on activity usage of that particular customer. If customer is responsible for more number of activities, one can drop the customer to reduce the costs.