Question

ERF Enterprises provides comprehensive AV services to institutions in the State of Colorado. Their customers fall into 3 categories - Hospitals, Schools and Hotels

ERF's Executive Vice President of Operations, Jennifer Murray, has noted that the Hotel business, while profitable, seems to take a lot of ERF's support resources

Ms. Murray has asked for your support in getting a better picture of the profitability of each of the 3 lines of business

She provides the following data on the support activities of ERF for a 12-month period

				Cost Driver	Cost per Unit
Site visits				# of visits	$100 per visit
Maintenance - minor repairs and support				Hours (incl travel)	$50 per hour
Phone calls and e-mails				# of calls/emails	$10 per call/e-mail

The average support-resource consumption by category is provided below:

Category		Site Visits	Maintenance (Hrs)	Calls/e-mails
Hospital		12	8	45
School		8	5	26
Hotel		64	20	12

Excluding the cost of support, the average profitability of each category is given below:

Category	Profit before cost of service and support
Hospital	$22,000
School	$20,000
Hotel	$25,000

Q1. Provide Ms. Murray with a an activity-based analysis of the profitability of each category of customer

Q2. After reviewing the data and analyses, what advice may be given to service personnel to improve profitability of the category with the lowest profit (after support cost)?

Is there some unusual explanation for high activity levels which could be further investigated? What creative questions could be asked?          

Answer 1

The first part is to find the profiatbility of all the activities. Amount are in $

Particulars	Hospital	School	Hotel
Profit $	22,000	20,000	25,000
Number of site visits	12	8	64
Cost per site visit	100	100	100
Cost of site visites A	1,200	800	6,400
Maintenance Hours	8	5	20
Cost per hour	50	50	50
Cost of Maintenance B	400	250	1,000
Number of calls and emails	45	26	12
Cost of a call and email	10	10	10
Cost of calls and emails C	450	260	120
Total Cost (A+B+C)	2050	1310	7520
Profit	19,950	18,690	17,480

This will give Mr. Murray a clear picture of the profitability of its business from different activities.

2. The lowest profit making business will be of hotel. The suggestion that i would like to recommend to Mr. Murray is that the number of site visits should be reduced while other businessess Hospital and School take only 12 and 8 visit respectively Hospital alone takes up 64 and shoots the costs to $6400 so this has to be reduced by service personnel.

3. Service personnel can be asked to fill in the customer feedback form each time the service is delivered, Why such number of visit was required, can cross verify from the customers hotel, hospitals and school whether they actually appeared. these are few question which can be asked.