Deck 17: Topic Focus Customer Profitability

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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.

Answer 3

True

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

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 6

If unprofitable customers cannot be turned to profitable ones,the company should never drop them.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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)Only the depreciation cost.

Question 12

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

Question 13

Selling expenses include which of the following?

A)Storage of products
B)Sale of products
C)Delivery of products to customers
D)Storage of products,sale of products,and delivery of products to customers.

Question 14

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

Question 15

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

Question 16

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

Question 17

If an unprofitable customer 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)Not dropping the customer.

Question 18

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 19

Customer net profit divides customer net profit by customer revenues.

Question 20

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

Question 21

Which of the following is 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 22

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 23

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 24

Which of the following is not a step in using activity-based costing to estimate customer profitability?

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

Question 25

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)Average contribution margin.

Question 26

Which of the following is not an administrative expense?

A)Controller's salary
B)Depreciation on office equipment
C)Fixed overhead
D)Controller's salary,Depreciation on office equipment ,and fixed overhead.

Question 27

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 28

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 29

Which of the following is not an administrative expense?

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

Question 30

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 31

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

A)Product
B)Selling
C)Administrative
D)Product,Selling,and Administrative

Question 32

If a customer 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)The company's over profit will increase,the company's revenue will decrease in the short-run,and the managers will have more resources to serve profitable customers.

Question 33

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 34

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 35

Which of the following is 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 36

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 37

Which of the following is a step managers might take after identifying an unprofitable customer?

A)Identify the reason the customer is unprofitable
B)Work with the supplier to increase costs.
C)Require the customer to reimburse the company for any losses attributed to the customer
D)Eliminate customer entirely.

Question 38

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 39

Which of the following is 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 40

Which of the following would 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 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

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

Question 43

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.

Question 44

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

Question 45

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