Question

Minnesota Manufacturing makes a component called Upper B2040. This component is manufactured only when ordered by a​ customer, so Mississippi keeps no inventory of Upper B2040. The list price is $114 per​ unit, but customers who place​ "large" orders receive a 14% discount on price. The customers are manufacturing firms.​ Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is​ finished, it is packed in cases of 10. If the component needs to be exchanged or​ repaired, customers can come back within 14 days for free exchange or repair.

information about Minnesota​'s five biggest customers​ follows:

	Customer
	A	B	C	D	E
Number of units purchased	5,200	1,200	600	4,800	8,900
Discounts given	14%	14%	0%	14%	14% on half the units
Number of orders	6	18	54	30	24
Number of cases	580	150	110	450	830
Number of rush orders	5	5	2	0	11
Number of units exchanged/repaired	15	100	11	70	260

All customers except E ordered units in the same order size. Customer E​'s order quantity​ varied, so E got a discount part of the time but not all the time.

The full cost of manufacturing a unit of Upper B2040 is $ 88. In​ addition, Minnesota incurs​ customer-level costs.​ Customer-level cost-driver rates​ are:

Order taking	$300 per order
Product handling	$14 per case
Rush-order processing	$590 per rush order
Exchange and repair costs	$70 per unit

Requirement:

1. Calculate the​ customer-level operating income for these five customers. Use the format provided. Prepare a​ customer-profitability analysis by ranking the customers from most to least profitable.

Begin by calculating the​ customer-level operating income for these five customers. ​(For accounts with a​ $0 balance, make sure to enter​ "0" in the appropriate cell. Use parentheses or a minus sign when entering operating​ losses.)

	A	B	C	D	E
Revenues at list price
Price discounts			0
Revenues at actual prices
Cost of goods sold
Gross margin

2. Discuss the results of your​ customer-profitability analysis. Does Minnesota have unprofitable​ customers? Is there anything Minnesota should do differently with its five​ customers?

Answer 1

Answer is given below

1 Customer level operating income C $68,400 A $592,800 $82,992 $509,808 $457,600 $52,208 B $136,800 $19,152 $117,648 $105,600 $12,048 D $547,200 $76,608 $470,592 $422,400 $48,192 E $1,014,600 $71,022 $943,578 $783,200 $160,378 Total $2,359,800 $249,774 $2,110,026 B $1,821,600 $288,426 $68,400 $52,800 $15,600 Revenue at list price Price discounts Revenues at actual price Cost of goods sold Gross margin Less: Customer service cost Order taking Product holding Rush-order processing Exchange and repair Total customer service costs Customer level operating income Customer wise return on Net sales Ranking $9,000 $6,300 $1,800 $8,120 $2,950 $1,050 $13,920 $38,288 7.5% $5,400 $2,100 $2,950 $7,000 $17,450 -$5,402 -4.6% $16,200 $1,540 $1,180 $770 $19,690 -$4,090 -6.0% IV I $4,900 $20,200 $27,992 5.9% III $7,200 $11,620 $6,490 $18,200 $43,510 $116,868 12.4% $39,600 $29,680 $13,570 $31,920 $114,770 $173,656 A 8.2% A/B I V 2 Out of 5 customers 3 are profitable and 2 are unprofitable Customer A, D and E are profitable customers Customer B and Care unprofitable. Either the sales should increase to them or cost of servicing should be reduced Minnesota can measure the return on net sales and see profitability of the customers Working note: Activities consumed - Customer wise Total Activities 132 2,120 Number of orders Number of cases Number of rush orders Number of units 456 Customer servicing costs $9,000 $6,300 orders taking- $300 per order Product handling -$14 per case Rush orders processing- $590 per rush order Exchange and repair - $70 per unit Total $1,800 $8,120 $2,950 $1,050 $13,920 $5,400 $2,100 $2,950 $7,000 $17,450 $16,200 $1,540 $1,180 $770 $19,690 $7,200 $11,620 $6,490 $18,200 $43,510 Total Cost $39,600 $29,680 $13,570 $31,920 $114,770 $4,900 $20,200