Deck 17: Topic Focus Customer Profitability

Question 1

One way for managers to get an estimate of customer profitability is to allocate expenses to customers through activity-based costing.

Answer 1

True

Question 2

When a manager drops an unprofitable customer,a company's total sales revenue and overall company profit will decrease.

Answer 2

False

Question 3

If the sales revenue a customer generates exceeds the cost of goods sold,the customer is considered

A)Profitable
B)Not profitable
C)A "best customer"
D)Cannot determine from the information given

Answer 3

Cannot determine from the information given

Question 4

Before a manager decides to drop an unprofitable customer,the manager should evaluate all the implications of the action for the affected customer,for other customers,and for the company.

Question 5

In their book Killer Customers,Larry Selden and Geoffrey Colvin estimate that the bottom 5% of a company's customers lose as much as 100% of the company's profits.

Question 6

If an unprofitable customer $\textbf{ cannot }$ be turned into a profitable one,the company should consider

A)Lowering its selling price for the customer
B)Dropping the customer
C)Increasing the selling price until the customer become profitable
D)None of these ans choices are correct

Question 7

Calculations to measure customer profitability include customer net profit and customer profit margin.

Question 8

Customer net profit divides customer net profit by customer revenues.

Question 9

The customer net profit shows managers how many dollars a customer contributes to the company's bottom line.

Question 10

If unprofitable customers $\textbf{ cannot }$ be turned to profitable ones,the company should $\textbf{ never }$ drop them.

Question 11

Customer profit margin divides customer net profit by customer revenues to obtain the profit percentage the customer generates for the company.

Question 12

Raising prices for unprofitable customers is a reflection of the cost of doing business with them.

Question 13

Measuring customer profitability only by looking at whether the sales revenue a customer generates exceeds the cost of goods sold ignores

A)All the selling and administrative costs incurred to provide customer service and support.
B)Manufacturing costs incurred as overhead.
C)All fixed costs.
D)None of these ans choices are correct.

Question 14

The customer profit margin allows managers to compare customers based on how much each dollar of revenue they generate goes to the bottom line,regardless of the customers' absolute sales volume.

Question 15

Selling expenses include which of the following?

A)Storage of products
B)Sale of products
C)Delivery of products to customers
D)All of these ans choices are correct

Question 16

In their book Killer Customers,Larry Selden and Geoffrey Colvin estimate that the top 20% of a company's customers generate approximately 120% of the company's profits.

Question 17

Selling expenses are expenses that are associated with only the delivery of products to the customer.

Question 18

Customer profit margin is calculated as customer net profit divided by customer gross profit.

Question 19

In their book Killer Customers,Larry Selden and Geoffrey Colvin estimate what percentage of a company's customers generates approximately 120% of a company's profits?

A)20%
B)40%
C)60%
D)80%

Question 20

As long as the sales revenue a customer generates exceeds the cost of goods sold,the customer is profitable.

Question 21

Which of the following measures shows manager how many dollars a customer contributes to the company's bottom line?

A)Customer net profit
B)Customer revenue margin
C)Times revenue earned per customer
D)Customer profit margin

Question 22

Which of the following is $\textbf{ not }$ a step managers might take after identifying an unprofitable customer?

A)Identify the reason the customer is unprofitable
B)Work with the customer to return him or her to profitability
C)Require the customer to reimburse the company for any losses attributed to the customer
D)All of these ans choices are steps managers might take after identifying an unprofitable customer

Question 23

Which of the following is $\textbf{ not }$ an example of how a company can help a customer become a profitable customer?

A)Encourage them to order in larger quantities to reduce shipping charges
B)Encourage them to order through the cheaper internet sales channel rather than the more costly catalog sales channel
C)Encourage them to delay payment on their account so as to forgo any sales discount
D)Ask them to pay all shipping charges

Question 24

Which of the following is $\textbf{ not }$ an administrative expense?

A)Factory supervisor's salary
B)Depreciation on office equipment
C)Payroll clerk's salary
D)Janitorial supplies

Question 25

Which of the following is $\textbf{ not }$ a step in using activity-based costing to estimate customer profitability?

A)Develop activity cost pools
B)Calculate equivalent
C)Allocate selling costs to customers
D)Calculate customer profitability

Question 26

Revenues a customer generates less cost of goods associated with those revenues and the selling expenses allocated based on the customer-specific selling activities is referred to as

A)Customer revenue margin
B)Times revenue earned per customer
C)Customer profit margin
D)Customer net profit

Question 27

The customer profit margin allows managers to compare customers based on

A)Absolute sales volume.
B)How much each dollar of revenue they generate goes to the bottom line,regardless of the customers' absolute sales volume.
C)How many dollars a customer contributes to the bottom line.
D)None of these ans choices are correct.

Question 28

If a customer $\textbf{ cannot }$ be returned to profitability and the customer is dropped,

A)The company's overall profit will increase.
B)The company's revenue will decrease in the short-run.
C)The managers will have more resources to serve profitable customers
D)All of these ans choices are correct.

Question 29

For each item below,identify whether the item applies to customer net profit or customer profit margin by marking an "X" in the appropriate column.

Question 30

The revenue a customer generates should cover which of the following costs?

A)Product
B)Selling
C)Administrative
D)All of these ans choices are correct

Question 31

Which of the following is $\textbf{ not }$ a step in using activity-based costing to estimate customer profitability?

A)Calculate earnings per share
B)Calculate activity cost pool rates
C)Allocate selling costs to customers
D)Calculate customer profitability

Question 32

The formula for the customer profit margin is

A)Customer net profit divided by customer revenue
B)Customer revenue divided by customer cost of goods sold
C)Customer revenue less cost of goods sold less allocated selling expenses
D)Customer profit margin less allocated selling and administrative expenses

Question 33

Which of the following is $\textbf{ not }$ a step in using activity-based costing?

A)Identify selling activities
B)Calculate activity cost pool rates
C)Calculate a predetermined overhead rate
D)Calculate customer profitability

Question 34

The customer profit margin divides

A)Customer net profit by customer revenue
B)Customer net profit by customer profit margin
C)Customer revenue by customer net profit
D)Customer profit margin by customer revenue

Question 35

Which of the following is $\textbf{ not }$ an administrative expense?

A)Controller's salary
B)Depreciation on office equipment
C)Fixed overhead
D)All of these ans choices are administrative expenses

Question 36

Which of the following would $\textbf{ not }$ be a selling expense?

A)Rent on warehouse space
B)Advertising on local TV station
C)Indirect labor
D)Depreciation on delivery truck

Question 37

Unprofitable customers should be

A)Dropped immediately.
B)Evaluated for implications that any action will have on the customer,other customers and the company.
C)Evaluated for implications that any action will have on the company only.
D)Required to reimburse the company for any losses

Question 38

The measure that divides customer net profit by customer revenues is referred to as

A)Customer revenue margin
B)Times revenue earned per customer
C)Customer profit margin
D)Customer net profit

Question 39

Two calculations that can be made to measure customer profitability are

A)Customer net profit and customer earnings per share
B)Times revenue earned per customer and customer revenue margin
C)Customer net profit and customer profit margin
D)Customer revenue margin and customer profit margin

Question 40

Georgia Manufacturing Company has provided the following information for calculating cost pool rates for selling activities:

Required:

Calculate the activity cost pool rate for each selling activity.

Question 41

Some companies believe that as long as the sales revenue a customer generates exceeds the cost of goods sold, that the customer is profitable. However, companies incur product costs, selling costs, and administrative costs.

Required:

a. List three items that would be classified as product costs.

b. List three items that would be classified as selling costs.

c. List three items that would be classified as administrative costs.

Question 42

Two calculations can be made to measure customer profitability: customer net profit and customer profit margin.
a.What is the formula for customer net profit?
b.What is the formula for customer profit margin?

Question 43

Assume you are a sales manager responsible for analyzing the profitability of the customers in your territory.You have gathered the following information on one of your customers:

a.Calculate the customer net profit.
b.Calculate the customer profit margin.

Question 44

Assume you are a sales manager responsible for analyzing the profitability of the customers in your territory.You have gathered the following information on one of your customers:

a.Calculate the customer net profit.
b.Calculate the profit margin.

Question 45

It may appear that all unprofitable customers should be dropped. However, before any action is taken, managers should evaluate all the implications of the action for the affected customer, for other customers, and for the company.

Required:

a. Explain three implications for the affected customer.

b. Explain three implications for other customers.

c. Explain three implications for the company.