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14-29 (Cont'd.)

The reasons for the $1.44 discount for T should be explored.

3.Dropping customers should be the last resort taken by Spring Distribution.  Factors to consider include:

a.What is the expected future profitability of each customer?  Are the currently unprofitable (T) or low-profit (P) customers likely to be highly profitable in the future?

b.Are there externalities from having some customers, even if they are unprofitable in the short run?  For example, some customers have a marque-value that is "in effect" advertising that benefits the business.

c.What costs are avoidable if one or more customers are dropped?

d.Can the relationship with the "problem" customers be restructured so that there is a "win-win" situation?  For example, could Customer T get by with fewer deliveries per month?

14-30  (40 min.)   Customer loyalty clubs and profitability analysis.

1.  

Gold Program

Revenues

  2,430 × 20 × ($200 0.90)

$  8,748,000

  2,430 × 30 × ($200 0.80)

 11,664,000

  2,430 × 10 × ($200 0.70)

   3,402,000

       Total revenues

 23,814,000

Variable Costs

  Hotel variable costs, 2,430 60 $65

   9,477,000

  Wine Costs

     2,430 50 $5

      607,500

     2,430 10 $20

      486,000

  Restaurant costs

     2,430 20 $10

      486,000

     2,430 30 $15

   1,093,500

     2,430 10 $20

      486,000

        Total variable costs

 12,636,000

Contribution margin

$11,178,000

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