Homework SourseNatural Paper Delivery has decided to analyze the profitabil
Natural Paper Delivery has decided to analyze the profitability of five new customers. It buys recycled paper at $12 per case and sells to retail customers at a list price of $15.10 per case. Data pertaining to the five customers are:
Customer
1
2
3
4
5
Cases sold
2,020
8,780
63,100
34,700
2,400
List selling price
$15.10
$15.10
$15.10
$15.10
$15.10
Actual selling price
$15.10
$14.85
13.20
$14.59
$13.65
Number of purchase orders
15
22
33
29
36
Number of customer visits
3
4
7
3
4
Number of deliveries
17
32
63
38
36
Miles traveled per delivery
21
9
10
12
42
Number of expedited deliveries
0
0
0
0
3
Natural Paper Delivery\'s five activities and their cost drivers are:
Activity
Cost Driver Rate
Order taking
$150 per purchase order
Customer visits
$90 per customer visit
Deliveries
$2 per delivery mile traveled
Product handling
$0.40 per case sold
Expedited deliveries
$390 per expedited delivery
1.
Compute the customer-level operating income of each of the five retail customers now being examined (1, 2, 3, 4, and 5). Comment on the results.
Begin by calculating each customer\'s gross margin. Then calculate the operating income for each customer.
2.
What insights do managers gain by reporting both the list selling price and the actual selling price for each customer?
3.
What factors should managers consider in deciding whether to drop one or more of the five customers?
| Customer | |||||
| 1 | 2 | 3 | 4 | 5 | |
| Cases sold | 2,020 | 8,780 | 63,100 | 34,700 | 2,400 |
| List selling price | $15.10 | $15.10 | $15.10 | $15.10 | $15.10 |
| Actual selling price | $15.10 | $14.85 | 13.20 | $14.59 | $13.65 |
| Number of purchase orders | 15 | 22 | 33 | 29 | 36 |
| Number of customer visits | 3 | 4 | 7 | 3 | 4 |
| Number of deliveries | 17 | 32 | 63 | 38 | 36 |
| Miles traveled per delivery | 21 | 9 | 10 | 12 | 42 |
| Number of expedited deliveries | 0 | 0 | 0 | 0 | 3 |
Solution
1.
Customer 4 is most profitable whereas customer 5 is the least profitable. The company incurs substantial costs on input materials which is eroding its profits.
2. By reporting both the list selling price and actual selling price, managers get to know the discount on the product. This will let the companny know if it has to allow the customer discount or not.
3. The managers should consider the relationship of the customer with the company. It should address questions such as if the customer will continue to be non profitable in the long run or is it only a temporary cash burn situation. The managers can also consider if they can work better terms and conditions with the customer to turnaround and make each customer more profitable.
| Customer | 1 | 2 | 3 | 4 | 5 |
| Cases (a) | 2,020 | 8780 | 63100 | 34700 | 2400 |
| Actual Selling price (b) | 15.1 | 14.85 | 13.2 | 14.59 | 13.65 |
| Sales (a*b) | 30502 | 130383 | 832920 | 506273 | 32760 |
| Expenses : | |||||
| Recycle paper purchase (No of cases*12) | 24240 | 105360 | 757200 | 416400 | 28800 |
| Gross Margin | 6262 | 25023 | 75720 | 89873 | 3960 |
| No of purchase orders | 2250 (15*150) | 3300 (22*150) | 4950 (33*150) | 4350 (29*150) | 5400 (36*150) |
| No of customer visits | 270 (3*90) | 360 (4*90) | 630 (7*90) | 270 (3*90) | 360 (4*90) |
| No of deliveries | 714 (21*17*2) | 576 (32*9*2) | 1260 (63*10*2) | 912 (38*12*2) | 3024 (36*42*2) |
| Product Handling Cost | 808 (2020*0.4) | 3512 (8780*0.4) | 25240 (63100*0.4) | 13880 (34700*0.4) | 960 (2400*0.4) |
| Expedited delivery cost | 0 | 0 | 0 | 0 | 1170 (3*390) |
| Operating Income/(Loss)(Gross Margin- Expenses) | 2220 | 17275 | 43640 | 70461 | (6954) |
