Deck 6: Managing Customer Profitability

Question 1

In most companies, all customers are equally profitable

Answer 1

False

Question 2

The concept of activity-based costing is used to determine how serving particular customers causes activities to be performed and costs to be incurred under customer profitability analysis.

Answer 2

True

Question 3

Outsourcing is not useful in meeting customer needs because fixed costs remain constant.

Answer 3

False

Question 4

Customer profitability analysis helps management see the overall financial picture for each customer and how management can use this information to help establish a strategic plan for the coming periods.

Question 5

Quantitative factors in customer profitability analysis include the status of being a supplier to a prestigious company and the potential to meet new contacts.

Question 6

When management is determining where to devote the company's resources in serving customers, it needs to remember that, typically, the lion's share of profits comes from the majority of their customers.

Question 7

The decision to keep certain customers holding on the phone may be the result of customer profitability analysis.

Question 8

It is generally best to tie employee incentives as closely as possible to organizational goals.

Question 9

Typical measures of product delivery performance include the percentage of on-time deliveries, the percentage of orders filled and the delivery cycle time.

Question 10

Quality-related measures such as the number of customer complaints, the number of warranty claims, and the number of product units returned, are important in assessing the company's effectiveness in serving its customers.

Question 11

Customer-related costs include selling costs, marketing costs, ordering costs and distribution costs.

Question 12

Generally, budget levels that seem to motivate best are moderately tight but are perceived by employees as reasonable and attainable.

Question 13

The allocation method used in determining customer profitability has no effect on customer profitability analysis.

Question 14

Customer profitability analysis is not useful in the service industry.

Question 15

Return on Sales is operating income divided by total assets.

Question 16

It is possible for a company to have profitable products and, at the same time, incur customer-related costs that make certain customer relationships unprofitable.

Question 17

When ABC analysis relies on a cost hierarchy of unit-level, batch-level, product-line level, and facility-level costs, the cost management team is focusing on the customer-related costs.

Question 18

In computing overall company profitability, the method of cost allocation to products is not important.

Question 19

Customer profitability analysis is useful in identifying the effectiveness of a new raw material mix.

Question 20

Many of a company's costs are incurred before the actual production phase or committed early in a product's life.

Question 21

Unprofitable customers should be eliminated quickly by the company.

Question 22

The idea that employees should be held accountable for what they control means that factors outside of their control should be ignored in evaluating performance.

Question 23

Distribution costs include the costs of packing, shipping, and delivering products or services to customers.

Question 24

Common-size customer profitability statements show the dollar amount of operating income by customer type.

Question 25

All other things being equal, decreasing the annual rent on the customer service office will increase the contribution margin.

Question 26

Customer profitability analysis would be useful in determining the effectiveness of a new customer service help line.

Question 27

Increasing market share will always lead to increased profit.

Question 28

A customer profile categorizes individual customers according to their major cost or revenue drivers.

Question 29

Use the following to answer questions:
Adelaide Proctoris computing return on sales for all of her customers. Her results indicate the following


-Return on sales for Customer A is:

A) (20%)
B) 20%
C) (15%)
D) 35%

Question 30

Use the following to answer questions:
Adelaide Proctoris computing return on sales for all of her customers. Her results indicate the following


-Assuming operating costs are fixed, in order to break even for Customer B, sales must increase by approximately

A) $400,000
B) $ 1,142,857
C) $615,384
D) $ 2,650,000

Question 31

Use the following to answer questions:
Adelaide Proctoris computing return on sales for all of her customers. Her results indicate the following


-All of the following would be reasons to keep Customer B except:

A) The synergy between Customer A and Customer B
B) Ms. Smith believes Customer B will attract additional customers
C) The Operating Costs are fixed and will not change even if Customer B is dropped
D) All of the Operating Costs are variable and those allocated to Customer B will be eliminated if customer B is dropped

Question 32

Which of the following factors can result in some customers being more profitable than others?

A) Ordering in small quantities
B) Frequent changing of orders
C) Needing special parts or engineering design
D) All of the above are factors

Question 33

What issues come up in the task of assigning costs to customers?

A) A system that enables the company to identify which customers are using customer support services and how frequently they do so
B) Tracking the time the marketing department spends on a customer to make the sale and to provide ongoing services
C) Cost of making the product or providing a service for the customer
D) All of the above

Question 34

____is (are) determined by the company's ability to maintain its share of the market and the overall demand for the products of the industry

A) Tax allowance
B) Labor costs
C) Sales
D) Research and development expenditures

Question 35

As part of customer profitability analysis, the relative use of certain activities by customers is compared to a norm. When the comparison shows excessive use of an activity by a customer, which of the following questions might be asked?

A) Is the problem a recent one?
B) Is the problem an ongoing one?
C) Is the problem getting worse?
D) All are possible questions

Question 36

Which of the following is not a customer-related activity?

A) Processing shipments
B) Special packaging
C) Sales contracts
D) All are customer-related activities

Question 37

Use the following to answer questions:
The following information is available for last year:


-If the salesperson's commission is 3 percent of sales, which product would he prefer to sell?

A) Product X
B) Product Y
C) Either Product X or Y
D) Neither Product X nor Y

Question 38

Use the following to answer questions:
The following information is available for last year:


-If the salesperson's commission is 10 percent of contribution margin, which product would he prefer to sell?

A) Product X
B) Product Y
C) Either Product X or Y
D) Neither Product X nor Y

Question 39

Gerogetown Company desires a return on sales (ROS) of 20%. They must find an additional cost reduction of $1,000,000from their current total costs of $9,000,000 assuming no changes in sales. Georgetown's current ROS is

A) 5%
B) 10%
C) 15%
D) None of the above

Question 40

Use the following to answer questions:
Parkhurst Company manufactures and distributes two types of back braces, adult braces, and pediatric braces to two types of customers, hospitals and physicians. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales (rounded) for Pediatric Braces is:

A) -4. 4%
B) 5. 2%
C) 25. 2%
D) 26. 7%

Question 41

Use the following to answer questions:
Parkhurst Company manufactures and distributes two types of back braces, adult braces, and pediatric braces to two types of customers, hospitals and physicians. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales (rounded) for Adult Braces is

A) -4. 4%
B) 5. 2%
C) 25. 2%
D) 26. 7%

Question 42

Use the following to answer questions:
Parkhurst Company manufactures and distributes two types of back braces, adult braces, and pediatric braces to two types of customers, hospitals and physicians. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales for Hospital Customers is

A) 5. 7%
B) 17. 2%
C) 22. 6%
D) 23. 8%

Question 43

Use the following to answer questions:
Parkhurst Company manufactures and distributes two types of back braces, adult braces, and pediatric braces to two types of customers, hospitals and physicians. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales for Physicians is

A) 5. 7%
B) 17. 2%
C) 22. 6%
D) 23. 8%

Question 44

Use the following to answer questions:
Parkhurst Company manufactures and distributes two types of back braces, adult braces, and pediatric braces to two types of customers, hospitals and physicians. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-If Parkhurst Company desires a return on sales of 25%, costs must be reduced by:

A) $ 1,000,000
B) $ 1,650,000
C) $ 22,350,000
D) $ 27,750,000

Question 45

Use the following to answer questions:
The Very Secret (VS) detective agency is investigating its computer research costs and hoping to trace those costs to each of its three customer types, commercial clients, government clients and individual clients. Very Secret uses in-house computer research and outsources other computer research. Very Secret bills its clients $70 per hours for each research hour regardless of type.


-VS's total research costs (rounded) for Government Clients are

A) $200,434
B) $422,632
C) $595,000
D) $165,066

Question 46

Use the following to answer questions:
The Very Secret (VS) detective agency is investigating its computer research costs and hoping to trace those costs to each of its three customer types, commercial clients, government clients and individual clients. Very Secret uses in-house computer research and outsources other computer research. Very Secret bills its clients $70 per hours for each research hour regardless of type.


-On Individual Clients, VS makes an average hourly profit (rounded) on research billed of

A) $20
B) $26
C) $50
D) $53

Question 47

Easton Industries desires a return on sales of 20%. Their current sales revenue is $20,000,000 and their current return on sales is 15%. Assuming sales remain the same, to achieve their desired target profit, they must reduce their costs by

A) $1,000,000
B) $3,000,000
C) $4,000,000
D) None of the above

Question 48

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-The Current Contribution Margin Ratio for Picture This (rounded) is

A) 45. 0%
B) 47. 5%
C) 52. 5%
D) 55. 0%

Question 49

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-If Picture This desires a return on sales of 25%, costs must be reduced by:

A) $ 500,000
B) $ 825,000
C) $18,750,000
D) $19,250,000

Question 50

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales (rounded) for Large Frames is

A) 8%
B) 13%
C) 33%
D) 34%

Question 51

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales (rounded) for Small Frames is

A) 8%
B) 13%
C) 33%
D) 34%

Question 52

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales for Gift Shops is

A) 8%
B) 13%
C) 33%
D) 34%

Question 53

Use the following to answer questions:
Picture This (PT) manufactures two types of picture frames - large and small - that are sold to two types of customers - gift shops and discount stores. Information on the customers and products is presented below. (Assume operating costs are allocated based upon sales)


-Current return on sales for Discount Stores is

A) 8%
B) 13%
C) 33%
D) 34%

Question 54

The objectives of customer profitability analysis include

A) Identify the effectiveness of the current marketing program
B) Determine which customers are profitable
C) Determine which customer related activities can be modified to improve overall company profitability
D) All of the above

Question 55

When globe manufacturer Power Company discovered that their third largest customer type - elementary schools has a ROS of (10%) they decided to keep elementary schools as customers. Which of the following would be legitimate reasons to keep elementary schools as customers?

A) The potential to achieve sales to parents because of the presence of globes in the elementary school
B) Selling globes to elementary schools increase the potential to sell to more profitable high schools
C) By selling globes to elementary school, Power is able to sell atlases as well - a more profitable product
D) All of the above

Question 56

Common size financial statements

A) Are designed to fit everything on one page
B) Use common terms and show costs in thousands of dollars
C) Express items as percentages of revenue
D) All of the above

Question 57

Davidson'sIndustries makes chocolate candy bars in many shapes. Davidson's current Return on Sales is 15%. Davidson desires a profit of 20%. Assuming their product costs are $1,500,000 and they believe they can maintain sales of $2,500,000 to achieve their target profit, they must

A) Keep everything the same, but reduce operating costs by $625,000
B) Keep everything the same, but reduce cost of goods sold by $375,000
C) Keep everything the same, but reduce operating costs by $ 125,000
D) None of the above

Question 58

Gammon Industries wishes to increase its ROS to 20%. Their current Return on Sales is 15% and they believe that sales are fixed at $750,000. To achieve their target profit they can

A) Reduce operating costs by $37,500
B) Reduce the cost of goods sold by $37,500
C) Reduce total costs to $600,000
D) All of the above

Question 59

Use the following to answer questions:
Calumet Inc is investigating its phone ordering costs and hoping to trace those costs to each of its three customer types, individuals, book stores and internet sales. Calumet uses in-house phone service for regular hours questions and orders and an outside source for weekend evening phone service.


-Calumet's phone costs (rounded) for Individual Customers are

A) $144,000
B) $208,800
C) $206,400
D) $444,000

Question 60

Use the following to answer questions:
Calumet Inc is investigating its phone ordering costs and hoping to trace those costs to each of its three customer types, individuals, book stores and internet sales. Calumet uses in-house phone service for regular hours questions and orders and an outside source for weekend evening phone service.


-Calumet's phone costs (rounded) for Internet customers are

A) $144,000
B) $208,800
C) $206,400
D) $444,000

Question 61

Use the following to answer questions:
Calumet Inc is investigating its phone ordering costs and hoping to trace those costs to each of its three customer types, individuals, book stores and internet sales. Calumet uses in-house phone service for regular hours questions and orders and an outside source for weekend evening phone service.


-If Calumet believes the contribution margin on Internet customers is insufficient to cover the phone service costs and other related customer costs. An appropriate response would be:

A) Raise the cost of books sold on the Internet
B) "Charge" internet customers for phone service by replacing the toll free number shown on the web page with a toll call number
C) Use a separate phone numbers for Internet customers and increase the hold time for such customers to . reduce the overall phone service costs
D) All of the above

Question 62

In determining customer profitability, it is important to include:

A) Selling costs
B) Marketing costs
C) Research and development costs
D) All of the above

Question 63

When an unprofitable customer is discovered, managers may want to keep the customer but

A) Find ways to reduce the design activities related to the customer's product
B) Find ways to reduce the administrative costs of the customer
C) Both of the above
D) None of the above

Question 64

The following items would be shown separately on a Customer Profitability Statement

A) Manufacturing Overhead
B) Marketing Costs
C) Direct labor costs
D) All of the above

Question 65

A customer profitability analysis reveals a favorite customer of management is not profitable. The company should consider

A) Dropping the customer
B) Increasing the price charge to the customer
C) Modify the product or services provided to the customer
D) All of the above

Question 66

In a small grocery store, customer profit information should include information regarding

A) The use of coupons
B) Shopping times
C) Quantity of items purchased
D) All of the above

Question 67

Great Chocolates sells two types of candy - bars and gift boxes to two types of customers - airlines and gift shops:

Required:
1) Using the information above, prepare a customer profitability statement in absolute dollar amounts.
2) Using the information above prepare a common-size profit statement.
3) Management believes it is important to maintain the airline customers. They believe much of their gift shop demand is a result of airline passengers tasting the candy. Therefore, they do not want to drop the airlines as customers. Using the information above, what can Great Chocolates do to improve profitability?
4) Management believes it is important to maintain the airline customers. They believe much of their gift ship demand is a result of airline passengers tasting the candy. Therefore, they do not want to drop the airlines as customers. Assuming the operating costs are fixed, how much would sales of bars to the airline customers need to increase in order for Great Chocolates to achieve a break-even return on sales for the Airlines.
5) Management believes it is important to maintain the airline customers. They believe much of their gift shop demand is a result of airline passengers tasting the candy. Therefore, they do not want to drop the airlines as customers. Assuming the operating costs are fixed, how much would sales of gift boxes to the airline customers need to increase in order for Great Chocolates to achieve a break-even return on sales for the airlines.
6) Assume Great Chocolates desires a 40% return on sales. What level of profit enhancement is required to meet his profitability target at the same level of sales?

Question 68

Profitability of Customers: (Put your answers on the chart below. Show your work.)
Overhead Allocated to:
Sales and Cost of Goods Sold are:
A rather large candy company is attempting to determine the profitability of each of their customers. They are applying activity based costing methods to their overhead costs for marketing administrative, collection and customer service cost. Determine the amount of overhead allocated to the customers below using activity based costing to allocate the overhead.
The Overhead costs and related cost drivers are as follows:

Required:
1) Compute the amount of overhead allocated to Customers X, Y, and Z
2) Compute the profitability of Customers X, Y, and Z

Question 69

Briefly describe what is meant by customer profitability analysis and why it is important.

Question 70

Ms. Jorgenson, the Marketing Vice President of Gardner, Inc. noticed in a recent meeting that while the company was doing very well, its marketing expenses had been increasing over the last couple of years. She started asking questions of her salespeople and others in the department to see if they had any clues as to what was happening. Mr. Haynes, one of her top salespeople, came to her a couple of days after she started asking questions with some information about two of his customers. "Look at these figures. These are some of our best customers in terms of sales but they have been demanding more and more from us in the way of customer services. There should be a way of analyzing the use of customer services by customers or customer classes to see where the problems are and what we can do about them. "
Required: Prepare a report for Ms. Jorgenson, explaining to her about customer profitability analysis in very general terms.

Question 71

Ms Meyer, the Marketing Vice President of Lockwood, Inc. noticed in a recent meeting that while the company was doing very well, its marketing expenses had been increasing over the last couple of years. She started asking questions of her salespeople and others in the department to see if they had any clues as to what was happening.
Mr. Williams, one of her top salespeople, came to her a couple of days after she started asking questions with some information about two of his customers. "Look at these figures. These are some of our best customers in terms of sales but they have been demanding more and more from us in the way of customer services. There should be a way of analyzing the use of customer services by customers or customer classes to see where the problems are and what we can do about them. "
Required: Prepare a report for Ms. Meyer, explaining customer profitability analysis and its relationship to ABC.

Question 72

Greeley, Inc. is in the talking stages of developing a new product. The marketing, production, and R&D members of the development team start talking about the various costs that will arise and when they will arise and how there will be times they will overlap and by the end of the discussion, nothing is settled other than a bit of confusion. Ms. Manson, the team member from marketing, knowing about the product life cycle from a marketing standpoint, wonders if this is a similar issue and contacts a professor at the local university to get more information.
Required: You are the professor. Answer Ms. Manson's request in simple terms.

Question 73

Audio for You, an on-line provider of audio services, believes their toll-free Help Line costs are having a negative impact on profit.
How could customer profitability analysis help management?