Question

Ellie Mosk, CEO of X-Space Industries, decided to expand the company's product offering beyond the core model rocket business After investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies were interested in having X-Space develop these drones, and financial results, to date, have been encouraging. Revenue was $4 million, gross margins have been running about 40%, and the customer sales and support costs were $1 million. However, there is a growing concern that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability Activity Sales visits Product modifications Phone calls E-mail/electronic communications Cost Driver Sales visit days Number of modifications Number of minutes Number of communications Total Cost $ 490,000 274,000 93,400 176,000 $1,033,400 Visit Days Customer 875 Revenue $ 404,000 504,000 604,000 1. 140.000 1.500.000 $4,192,000 Gross Profit $ 154,000 204,000 234.000 424.000 594.000 $1,610,000 Phone Electronie Modifications Minutes Comunications 1,170 625 1,260 1.510 1.140 1,860 2,140 2.260 2,390 200 3,060 7.170 270 < Prey 3 of 3 ! Next

Answer 1

Answer with working note is given below

1 Customer profitability analysis A $404,000 $154,000 B $504,000 $204,000 C $604,000 $234,000 D $1,140,000 $424,000 E $1,540,000 $594,000 Total $4,192,000 $1,610,000 Sales Gross profit Less: Sales and Support cost allocation (Ratio of Total Sales) * Customer profitability Customer wise return on sales $99,593 $54,407 13.5% $124, 245 $79,755| 15.8% $148,896 $85,104 14.1% $281,0301 $142,970 12.5% $379,636 $214,364 13.9% $1,033,400 $576,600 13.8% * Total Sales and Support cost/Total Sales X Customer wise Sales Customer profitability analysis based on ABC D A $404,000 $154,000 B $504,000 $204,000 C $604,000 $234,000 $1,140,000 $424,000 $1,540,000 $594,000 Total $4,192,000 $1,610,000 Sales Gross profit Less: Sales and Support cost allocation Sales visits Product modifications Phone calls E-mail/electronic communications Total Sales and Support Cost Customer profitability Customer wise return on sales $27,222 $20,550 $13,558 $15,342 $76,672 $77,328 19.1% $45,370 $20,550 $14,601 $21,478 $102,000 $102,000 20.2% 20.2% $72,593 $54,800 $17,498 $27,983 $172,874 $61,126 $163,333 $82,200 $21,554 $52,530 $319,617 $104,383 9.2% $181,481 $95,900 $26,189 $58,667 $362,237 $231,763 15.0% $490,000 $274,000 $93,400 $176,000 $1,033,400 $576,600 13.8% ca 10.1% Working note: Activities consumed Customer wise 90 15 Total Activities 270 200 8,060 7,170 Visit Days Modifications Phone Minutes Electronic Communications 40 100 70 2,260 2,390 1,170 625 1,260 875 1,510 1,140 1,860 2,140 Sales visits Product modifications Phone calls E-mail/electronic communications Total Sales and support costs Total cost $490,000 $274,000 $93,400 $176,000 $1,033,400 Total activities 270 200 8,060 7,170 Cost per activity $1,814.81 Per Sale visit $1,370.00 per product modification $11.59 per phone call $24.55 per e-mail/electronic communication Support cost allocation based on Activities consumed Activities consumed * Activity Cost Rate A Visit Days $27,222 Modifications $20,550 Phone Minutes $13,558 Electronic Communications $15,342 Total Sales and support costs $76,672 B $45,370 $20,550 $14,601 $21,478 $102,000 C $72,593| $54,800 $17,498 $27,983 $172,874 D $163,333 $82,200 $21,554 $52,530 $319,617 E $181,481 $95,900 $26,189 $58,667 $362,237 Total Cost $490,000 $274,000 $93,400 $176,000 $1,033,400