Required 1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers. 2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis. 3. Compare the results from requirements 1 and 2 above. What are some strategic implications for management?

Required 1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers. 2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis. 3. Compare the results from requirements 1 and 2 above. What are some strategic implications for management?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Phone
Electronic
Gross Profit Visit Days Modifications Minutes Communications
Customer
Revenue
$ 400,000 $ 150,000
500,000
600,000
1,000,000
1,500,000
15
1,030
625
15
200,000
230,000
420,000
25
15
1,120
1,370
1,720
2,120
7,360
875
40
40
90
100
1,000
2,000
2,250
60
590,000
$4,000,000 $1,590,000
70
Totals
270
200
6,750
Required
1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue.
Using total revenue as the allocation base, determine the profitability of each of the five customers.
2. Management felt that because the data revealed some customers require a disproportionate share of
sales and support resources, activity-based costing should be used to determine customer profitability.
Use ABC to prepare a customer profitability analysis.
3. Compare the results from requirements 1 and 2 above. What are some strategic implications for
management?
ABCDE

5-49 Customer Profitability Analysis Ellie Mosk, CEO of X-Space Industries, decided to expand the
company's product offering beyond the core model rocket business. After investigation, she decide
to set up a separate division to design and manufacture products for the drone market. Several come
nies were interested in having X-Space develop these drones, and financial results, to date, have e
encouraging. Revenue was $4 million, gross margins have been running about 40%, and the cu
customers is unknown. Data were collected to support an analysis of customer profitablny-
Activity
Cost Driver
Sales visits
Product modifications
Total Cost
Sales visit days
Number of modifications
Number of minutes
$ 486,000
Phone calls
260,000
92,000
162,000
$1,000,000
E-mail/Electronic communications
Number of communications

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