Exam 13: Setting and Achieving Targets in the Customer Domain

Nonfinancial measures of performance in the customer domain may be preferred to financial measures because they provide a more timely indicator of future financial performance.

Cooper Company is trying to improve its customer profitability analysis by tracing more of its indirect costs to customers. The company has performed an activity analysis and has identified three indirect cost pools: order taking, sales calls, and product deliveries. Cooper Company has assembled data regarding the costs of these three activities and the amounts consumed by its four customers. The data is presented in the table below: Required: Develop an activity-based cost rate for each activity and use it to trace the costs to the individual customers.

Of the four archetypal customers, those classified as "wealthy and demanding" are the most profitable because they are willing to pay high prices.

Biodex, Inc., produces a single product, an herbicide called GrassNoMore. One of Biodex's key customers is the Amontillado Winery Company, which uses the product to control weeds growing between rows of grapevines. GrassNoMore and competing products are sold by the pound. The table below contains information Biodex has assembled regarding sales made to Amontillado Winery Company in the most recently concluded year. Sales of GrassNoMore to Amontillado Winery Company Required: Compute the following variances and show that they reconcile to the total favorable profit variance of $164,600: Customer Purchase Volume Variance Customer Market Share Variance Price Variance Cost Spending Variance

Lifetime profitability should be the basis for deciding to retain or discourage a currently unprofitable customer.

It is not unusual to find that a high proportion of a company's profits are derived from a relatively small proportion of its customers.

Alpha Company provides tax planning and consulting services. Last year, Alpha captured a larger than anticipated share of Mega Company's purchases of such services. In a variance analysis of customer profitability, this difference will be noted by:

Joe Wilson is a frequent flier on Delta Airlines. Because of a long history of good experience with the airline, Joe always chooses Delta even when a competing carrier offers a lower fare or more convenient connections. Delta would view Joe as what type of customer?

Once a customer has been identified as unprofitable, the only rational course of action for management is to drop or abandon that customer.

Knotts Woodproducts Company mills and distributes high-quality hardwoods to furniture manufacturers. For the purpose of measuring customer profitability, the company assigns its order processing and delivery costs to customers based on each customer's share of Knotts' total sales revenue. Of the following circumstances, which would render the resulting profitability measures misleading?

Improving customer retention may have little or no effect on current period profits, but will have a significant effect on future profits because:

Once identified, "business-value-added activities" and the costs associated with them should be eliminated because customers place no direct value on them.

Of the following customer types, which will likely exhibit the greatest sensitivity to a change in price?

In its strategy map, Southwest Airlines lists the following items: "time on the ground," "on-time departures," and "information system availability." These three nonfinancial performance measures are:

Customer profitability analysis requires that all selling, general, and administrative expenses be assigned to customers.

The key to performing quality customer profitability analysis is the ability to:

A useful measure of short-run customer profitability should account for which of the following costs?

Knotts Woodproducts Company mills and distributes high-quality hardwoods to furniture manufacturers. Of the items listed below, which should be viewed as a cost traceable to a particular customer and therefore part of a customer profitability analysis?

Ideal customers:

Blake Industries sells security systems and monitoring services to commercial clients. Blake regularly prepares variance analyses of customer profitability. Recently, it discovered that one of its largest clients purchased more security products and monitoring services than Blake had budgeted, and that Blake had received a larger share of this business than it had expected. The client was less costly to service than Blake had expected, resulting in a favorable cost spending variance. Nonetheless, the total profit variance associated with this customer was unfavorable. The variance results suggest that: