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14-29(40 min.)Customer profitability, distribution.

1.

Customer

    P

 Q

R

S

  T

Revenues at list pricesa

$29,952

$126,000

$875,520

$457,920

$56,160

Discountb

          0

     2,100

   72,960

   15,264

   5,616

Revenues (at actual prices)

Cost of goods soldc

Gross margin

Customer-level operating costs

29,952

 24,960

4,992

123,900

 105,000

   18,900

802,560

 729,600

   72,960

442,656

 381,600

   61,056

50,544

 46,800

      3,744

Order takingd

1,500

2,500

3,000

2,500

3,000

Customer visitse

160

240

480

160

240

Delivery vehiclesf

280

240

360

640

1,600

Product handlingg

1,040

4,375

30,400

15,900

1,950

Expedited runsh

          0

          0

            0

            0

      300

Total

   2,980

     7,355

   34,240

   19,200

   7,090

Customer-level operating income

$  2,012

$  11,545

$  38,720

$  41,856

$ (3,346)

a $14.40 2,080; 8,750; 60,800; 31,800; 3,900

b ($0.00 50,000); ($0.24 8,750); ($1.20 60,800);

($0.48 31,800; $1.44 3,900)

c $12 2,080; 8,750; 60,800, 31,800; 3,900

d $100 15; 25; 30; 25; 30

e $80 2; 3; 6; 2; 3

f $2 (10 14); (30 4); (60 3); (40 8); (20 40)

g $0.50 2,080; 8,750; 60,800; 31,800; 3,900

h $300 0; 0; 0; 0; 1

Customer S is the most profitable customer, despite having only 52% of the unit volume of Customer R.  A major explanation is that Customer R receives a $1.20 discount per case while Customer S receives only a $0.48 discount per case.

Customer T is unprofitable, despite the smaller customer P being profitable.  Customer T receives a $1.44 discount per case, makes more frequent orders, requires more customer visits, and requires more delivery miles than Customer P.

2.Separate  reporting of both the list selling price and the actual selling price enables Spring Distribution to examine which customers receive different discounts and how salespeople may differ in the discounts they grant. There is a size pattern in the discounts across the 5 customers, except for Customer T:

  Sales Volume     Discount per case

R (60,800 cases)$1.20

S (31,800 cases)$0.48

Q  (8,750 cases)$0.24

T   (3,900 cases)$1.44

P   (2,080 cases)$0.00

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