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14-28(60 min.)  Customer-profitability analysis, customer cost hierarchy.

1.

ItemAprilMadisonSuitorsDesign   

Revenues at list prices

17,600a × $200; 12,400b × $200;

6,360c × $200; 6,250d × $200$3,520,000$2,480,000$1,272,000 $1,250,000

Discount

17,600 × $60e; 12,400 × $40f;

6,360 × $30g; 6,250 × $20h  1,056,000     496,000     190,800    125,000

Revenues (at actual prices)  2,464,000  1,984,000  1,081,200 1,125,000

Cost of goods sold

17,600 × $110; 12,400 × $110;

6,360 × $110; 6,250 × $110  1,936,000  1,364,000    699,600    687,500

Gross Margin     528,000     620,000    381,600    437,500

Customer-level operating costs

Order processing

44, 62, 212, 250 × $245       10,780       15,190       51,940      61,250

Sales visits

8, 12, 22, 20 × $1,430       11,440       17,160 31,46028,600

Delivery – regular

41, 48, 166, 190 × $300       12,300       14,400 49,80057,000

Delivery – rushed

3, 14, 46, 60 × $850         2,550       11,900 39,10051,000

Total customer-level operating

   costs       37,070       58,650     172,300    197,850

Customer-level operating income$   490,930$   561,350$   209,300$  239,650

a44 × 400 = 17,600

b62 × 200 = 12,400

c212 × 30 = 6,360

d250 × 25 = 6,250

e$200 – $140 = $60

f$200 – $160 = $40

g$200 – $170 = $30

h$200 – $180 = $20

2.Key challenges facing Sims are:

a.

Reduce level of price discounting, especially by April

b.

Reduce level of customer-level costs, especially by Suitors and Design

The ABC cost system highlights areas where the Suitors and Design accounts are troublesome. They have:

A high number of orders,

A high number of customer visits, and

A high number of rushed deliveries.

Sims needs to consider whether this high level of activity can be reduced without reducing customer revenues.

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