## Stable Paper Delivery: Customer Profitability AnalysisStable Paper Delivery is undertaking an analysis to determine the profitability of five new customers. The company purchases recycled paper at $12 per case and sells it to retail customers for a list price of $14.80 per case. The following data pertains to these five customers:### Requirements for Analysis1. Compute the customer-level operating income for each of the five retail customers (1, 2, 3, 4, and 5) and comment on the results.2. Discuss the insights managers can gain by comparing the list selling price with the actual selling price for each customer.3. Consider the factors managers should evaluate when deciding whether to drop one or more of the five customers.### Data Overview#### Sales and Pricing- **Cases Sold** - Customer 1: 1,700 - Customer 2: 8,780 - Customer 3: 61,800 - Customer 4: 33,000 - Customer 5: 2,300- **List Selling Price** (per case): $14.80 for all customers- **Actual Selling Price** (per case) - Customer 1: $14.80 - Customer 2: $14.55 - Customer 3: $13.10 - Customer 4: $14.23 - Customer 5: $13.32#### Operational Data- **Number of Purchase Orders** - Customer 1: 18 - Customer 2: 22 - Customer 3: 39 - Customer 4: 24 - Customer 5: 34- **Number of Customer Visits** - Customer 1: 3 - Customer 2: 4 - Customer 3: 7 - Customer 4: 9 - Customer 5: 7- **Number of Deliveries** - Customer 1: 20 - Customer 2: 32 - Customer 3: 69 - Customer 4: 27 - Customer 5: 11- **Miles Traveled Per Delivery** - Customer 1: 21 - Customer 2: 7 - Customer 3: 24 - Customer

The manager should calculate the amount of gross income by reducing the variable costs including customer level activity costs and then take appropriate decisions.Requirement 1: Allocation and calculation of customer-level activity costs: Formulas used: Calculation of gross income for each customer: Formula used: Comment on results: We understand that the gross margin of customer 5 is negative and hence manager should take appropriate decisions.Requirement 2: Reporting of list selling price and actual selling price will allow the managers to determine the amount of discount allowed to each customer. All the customers except customer 1 have availed discount as shown below: 2 3 4 5 List Selling Price $14.80 $14.80 $14.80 $14.80 Actual Selling Price $14.55 $13.10 $14.23 $13.32 Discount $0.25 $1.7 $0.57 $1.48Requirement 3: The managers should focus on the following factors in order to decide which customer/customers should be dropped: 1. Gross margin 2. Discount allowed 3. Number of expediating deliveries After analyzing the above mentioned aspects for all the customers, the managers may urge to drop customer 5 because the number of expediating deliveries for customer 5 is 3 which results in increase in extraordinary expenses. Apart from it, the customer is availing the maximum amount of discount. Furthermore, the gross margin of customer 5 is negative, i.e, it is leading to loss.