ST is a distribution company which buys a product in bulk from manufacturers, repackages the product into smaller packs and then sells the packs to retail customers. ST’s customers vary in size and consequently the size and frequency of their orders also varies. Some customers order large quantities from ST each time they place an order. Other customers order only a few packs each time. The current accounting system of ST produces very basic management information that reports only the overall company profit. ST is therefore unaware of the costs of servicing individual customers. However, the company has now decided to investigate the use of Direct Customer Profitability Analysis (DCPA). ST would like to see the results from a small sample of customers before it decides whether to fully introduce DCPA. The information for two customers, and for the whole company, for the previous period was as follows: Customer B D Company Factory contribution ($000) 75 40.5 450 Number of: Packs sold (000) 50 27 300 Sales visits to customers 24 12 200 Orders placed by customers 75 20 700 Normal deliveries to customers 45 15 240 Urgent deliveries to customers 5 0 30 Activity costs: $000s Sales visits to customers 50 Processing orders placed by customers 70 Normal deliveries to customers 120 Urgent deliveries to customers 60 Required (a) Prepare a Direct Customer Profitability Analysis for each of the two customers. (b) Explain how ST could use DCPA to increase its profits.
ST is a
distribution company which buys a product in bulk from manufacturers, repackages the product into smaller packs and then sells the packs to retail customers. ST’s customers vary in size and consequently the size and frequency of their orders also varies. Some customers order large quantities from ST each time they place an order. Other customers order only a few packs each time.
The current accounting system of ST produces very basic management information that reports only the overall company profit. ST is therefore unaware of the costs of servicing individual customers. However, the company has now decided to investigate the use of Direct Customer Profitability Analysis (DCPA). ST would like to see the results from a small sample of customers before it decides whether to fully introduce DCPA.
The information for two customers, and for the whole company, for the previous period was as follows:
Customer
B D Company
Factory contribution ($000) 75 40.5 450
Number of:
Packs sold (000) 50 27 300
Sales visits to customers 24 12 200
Orders placed by customers 75 20 700
Normal deliveries to customers 45 15 240
Urgent deliveries to customers 5 0 30
Activity costs: $000s
Sales visits to customers 50
Processing orders placed by customers 70
Normal deliveries to customers 120
Urgent deliveries to customers 60
Required
(a) Prepare a Direct Customer Profitability Analysis for each of
the two customers.
(b) Explain how ST could use DCPA to increase its profits.
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