Question

SkiBlu, Ltd., divides its customers into Gold customers and Silver customers. The company has one full-time customer representative per 1,000 Gold customers and one full-time customer representative per 10,000 Silver customers. Customer representatives receive salaries plus bonuses of 10 percent of customer gross margin. SkiBlu spends 80 percent of its promotion costs on Gold customers to encourage their loyalty.

Customer Costs	Total			Gold			Silver
Number of customers		110,000			40,000			70,000
Average customer representative salary				$	80,000		$	80,000
Promotion costs	$	4,900,000
Average gross margin per customer				$	710		$	310

  

Required:

a. Calculate the totals of the items below for both gold and silver customers, as well as the excess of gross margin over customer costs for each category. (Do not round intermediate calculations.)

	Gold	Silver
Total Gross Margin
Customer representative salaries & bonuses
Promotion costs
Excess of gross margin over customer cost

b. Which customers are more profitable?

Gold or Silver?   

Answer 1

SOLUTION

(A)

	Gold ($)	Silver ($)
Total gross margin	28,400,000	21,700,000
Customer representative salaries & bonuses	6,040,000	2,730,000
Promotion costs	3,920,000	980,000
Excess of gross margin over customer cost	18,440,000	17,990,000

Explanation-

Customer Costs	Gold ($)	Silver ($)
Number of customers	40,000	70,000
Number of customer representatives (40,000/1,000), (70,000/10,000)	40	7
Average gross margin per customer	710	310
Total gross margin ($710 * 40,000? $310 * 70,000)	28,400,000	21,700,000
Customer representative salary (@ $80,000 per customer representative)	3,200,000	560,000
Customer representative bonus (@ 10% of gross margin)	2,840,000	2,170,000
Promotion costs (80% Gold? 20% Silver)	3,920,000	980,000
Excess of gross margin over customer cost	18,440,000	17,990,000

(B) Gold customers are more profitable than silver customers after considering the costs of the representative and the promotion costs.