Question

Exercise 5-35 Customer Profitability Analysis (LO 5-6] Colleen Company has gathered the following data pertaining to activities it performed for two of its major customers. Jerry, Inc. Kate Co. 40 3,000 150 Number of orders Units per order Sales returns: Number of returns Total units returned Number of sales calls Colleen sells its products at $220 per unit. The firm's gross margin ratio is 30%. Both Jerry and Kate pay their accounts promptly and no accounts receivable is over 30 days. After using business analytics software to carefully analyze the operating data for the past 30 months, the firm has determined the following activity costs: Activity Sales calls Order processing Deliveries Sales returns Sales salary Cost Driver and Rate $ 900 per visit 420 per order 100 per order 270 per return and $5 per unit returned 110,000 per month Required: 1. Using customers as the cost objects, classify the activity costs into cost categories (unit-level, batch-level, etc.) and compute the total cost for Colleen Company to service Jerry, Inc. and Kate Co. 2. Compare the profitability of these two customers.

Answer 1

1.
	Jerry Inc.	Kate Co.
Customer unit level costs
Sales return	300	950
Customer batch level costs
Order processing	1,260	16,800
Sales return	270	1,080
Delivery	300	4,000
Customer sustaining costs
Sales calls	10,800	4,000
Total	12,930	26,830
2.
	Jerry Inc.	Kate Co.
Sales	1,980,000	1,320,000
Sales return	(13,200)	(41,800)
Net sales	1,966,800	1,278,200
Cost of goods sold	(1,376,760)	(894,740)
Gross margin	590,040	383,460
Sales support costs	(122,930)	(136,430)
Operating income(loss)	467,110	247,030
Operating margin(loss)	23.75%	19.33%
Working notes
Computation of Sales and Sales return
	Jerry Inc.	Kate Co.
Number of orders	3	40
Units per order	3,000	150
Total units sold	9,000	6,000
Sales price per unit	220	220
Total sales value	1,980,000	1,320,000
Total units returned	60	190
Sales price per unit	220	220
Total sales return value	13,200	41,800
Computation of gross margins and cost of goods sold
	Jerry Inc.	Kate Co.
Total sales value	1,980,000	1,320,000
Less:
Total sales return value	13,200	41,800
Net sales value	1,966,800	1,278,200
Gross margin @ 30% on net sales value	590,040	383,460
Cost of goods sold (Net sales - gross margin)	1,376,760	894,740
Computation of sales support costs
	Jerry Inc.	Kate Co.
Number of sales call	12	4
Sales call rate per call	900	900
Sales call costs	10,800	3,600
Number of orders	3	40
Order processing costs per call	420	420
Order processing costs	1,260	16,800
Number of returns	1	4
Sales return costs per return	270	270
Sales return costs	270	1,080
Total units returned	60	190
Sales return costs per unit	5	5
Sales return costs	300	950
Total sales return costs	570	2,030
Sales salary	110,000	110,000
Sales support cost
Sales call costs	10,800	3,600
Order processing costs	1,260	16,800
Sales return costs	570	2,030
Sales salary	110,000	110,000
Total sales support cost	122,630	132,430