Total sales of ABC Corp. is $100 M and net income is $11.5M. The manager belives...

Total sales of ABC Corp. is $100 M and net income is $11.5M. The manager belives that eliminating the group marginal customers which constitutes 10% of the total sales, will increase the performance of the company. Distribute the revenue and expenses of BC Corp. between the marginal customers and credible customers, based on income statement, indicate whether the company should eliminate marginal customers or not, in terms of net profit margin.

Percentage of sales total/ fixed/ variable

Cost of sales (%) 70/ - /70

Overhead cost (%) 15/ 8/ 7

Collection exp.(%) 1 /-/ 1

Other exp. (%) 2.5/2/ 0.5

Expert Solution

Based on the given data, pls find below workings:

The costs include the component and fixed as well as variable costs; At any point of time, when there are fixed costs in the firm, the same need to be effectively covered thru the varible margin, to have the overall net margin % positive or higher or better;

In this case, as well, if the marginal customers are not considered then the overall sales drop and associated variable margin portion drop resulting in reduction of fixed costs coverage capacity and thus drop in overall net income margin %; Hence, the maginal customers portion should not be eliminated.

jeff jeffy answered 1 year ago

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