14-20(2030 min.) Customer profitability, service company.
Santa Clara College
Solution Exhibits 14-20A and 14-20B present the summary results. The two most profitable customers provide 80% of total operating income.
2.The options Instant Service should consider include:
a.Increase the attention paid to Okie Enterprises and Wizard Partners. These are "key customers," and every effort has to be made to ensure they retain IS. IS may well want to suggest a minor price reduction to signal how important it is in their view to provide a cost-effective service to these customers.
b.Seek ways of reducing the costs or increasing the revenues of the problem accounts––Santa Clara College and Problem Solvers. For example, are the copying machines at Santa Clara outdated and in need of repair? If yes, an increased charge may be appropriate. Can IS provide better on-site guidelines to users about ways to reduce breakdowns?
c.As a last resort, IS may want to consider dropping particular accounts. For example, if Santa Clara College will not agree to a fee increase but has machines continually breaking down, IS may well decide that it is time not to bid on any more work for this customer.
3.Major problems in accurately estimating the operating costs of each customer are:
a.Basic underlying records may not be accurate. For example, some technicians include travel time, break time, etc., in their time records to create an appearance of high work effort.
b.Not all costs for individual repair people are easily assignable to individual customers. For example, how is the cost of a trip to pick up parts for three customers assigned among individual customers?
c.Many costs of IS are not related to specific customers. For example, advertising by IS is aimed at a general market rather than being targeted to a specific potential customer.