Customer Profitability Analysis And Recommendations For Interiors By Louise

Activity-based customer cost report

Statement showing activity based customer care report

Particulars	Architectural Business	Commercial Client Business
Adams Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Eim
Gross Revenue	234,000.00	73,200.00
Discount	23,400.00	3,660.00
Net Revenue	210,600.00	69,540.00
Revenue Contribution % Business wise	52.83%	12.10%
Revenue Contribution % total	21.64%	7.14%
Direct Cost	147,000.00	57,040.00
Allocation for Common in total Net Revenue sharing %	25,777.60	8,511.75
Total Overhead Cost	70,740.12	24,985.70
Total Cost (Direct + Overhead)	217,740.12	82,025.70
Net Profit	(7,140.12)	(12,485.70)

Table A
Total Overhead	340400
Allocation for Architectural Business @ 25	85100
Allocation for Commercial Business @ 40	136160
Common Overhead Allocation	119140

This part of the study is about the customer profitability analysis of the company. The operations of the company are divided into the two different distribution channels, and on the basis of the customer profitability analysis, the company is going to evaluate its performance. Customer profitability is the profit of the company by providing the goods and services to the customer. It is the important aspect for understanding the relationship with the customers. A profitable customer is a customer through whom the company generates the revenue more than the cost related for the attracting, selling and servicing to the customer.

Analysis

It has been observed that the company has two different segments namely, Architectural business segment and the commercial client business segment. There are two customers in the Architectural business segment namely Adams and Betz and three customers in the commercial client business namely Chatham, Dedham, and Eim.

On the basis of the above customer profitability analysis of the company, it has been observed that from the Architectural business, Betz and from the commercial client business Chatham is providing the profit to the company. The amount of the profit from the Betz is 7651.18 and from the Chatham are 10,573.50. However, the overall company was not profitable.

On the basis of the segment analysis of the company, an Architectural business segment of the company was profitable, but the commercial client business segment was in a loss. However, the percentage of the profit on the basis of the revenue from the architectural business segment is very less. Overall the performance of the company was very poor.

The poor performance may be due to the ineffective policies of the company. For gaining the competitive advantage company gave 10% discount to the Adams, despite of the fact that the overhead cost was very significant, the further company provide the discount; this leads to the loss from the Adam.

The revenue generated from the sale of the product to Adams was less than the cost of retaining. Even though the revenue generated from the Adams was more than as compared to the Betz, but the Betz assist the company in making a profit. Further in case of the commercial client business segment, company generated the more revenue from the Chatham as compare to the Dedham and Eim and the Chatham leads to the profit to the segment. However, the total loss from the Dedham and Eim was more than the profit from the Chatham. Therefore the overall commercial client segment was in a loss.

Customer profitability analysis

Further, the percentage of the direct cost of the revenue was also very high; this was another reason for the loss of the company.

Recommendations

On the basis of the present study, it has been evaluated that overall the company was in a loss. The first and primary step is to remove the loss-making customers from the company that is Adams, Dedham and Eim. However, before the removing customers, the company should also evaluate the other aspects of the business.

Since for gaining the competitive advantage, the company gave the discount to Adams 10%, if the company was not given the discount to the Adams, then the company will earn the profit. As given in the problem that amount of the discount given to Adams 23,400 and the loss from Adams 7140.2, so if this discount was not provided than Adams will make a profit of 16,259.8, which will be very high even compare with the existing profit of the Betz. Therefore it is recommendatory to the company that the company should change in its discount policy. There are so many strategies by which the company gain competitive advantages such as innovative product, new technology, promotion of the product, and focus on the product quality and services and so on, which leads to improvement in the profitability of the company (Kumar, 2015).

Further, the production cost plays a significant role in creating the profit, in this study the direct cost of the product very high. Therefore the company should reduce its direct cost associated with the product (Irvine, Park and Y?ld?zhan, 2015).  The company should use the alternative lower cost material, if possible. Along with this company should design the product in such a manner which will reduce the waste generated from the product (Lun et al. 2016).  Along with this company should also find the new supplier, which will fulfil the requirement of the company at fewer prices.

Apart from the above company should also focus on the market strategies and promotion techniques for sale of the product and explore the premium customer segment, so that they will purchase the product at the higher price (Rebelo and Gomes, 2017). But for adopting this strategy, the company will have to focus on maintaining the quality, delivering the best customer services so that satisfaction of the customer will increase and they will remain loyal to the company.

Conclusion

On the basis of above study, it has been concluded that customer profitability analysis is the difference between the revenue generated from the customer by serving the goods and services to them and the cost associated for maintaining the customer relationship. Further, the customer profitability analysis assists the manager to make the strategy for achieving the objective of the company because this analysis measures the profitability of the firm with respect to the customer of the firm. By observing the profitability of each customer, the company can look at their performance. In this study, customer analysis is based on the activity based costing method for allocation of the overhead, which leads to the allocation of the overhead in a precise and accurate manner

Particulars	Formula	Super chip	Okay chip
Sales prices		$80	$26
Variable cost
Direct material		$5	$2
Direct labour		$60	$20
Contribution	(Sales-variable cost)	$15	$4
Hours to produce		3.00	1.00
Contribution per hour	Contribution / hours for production	$5.00	$4.00
Ranking		1.00	2.00
Hours for production			45000
Units to be produced of super chip	Maximum units can be sold * hours required for the production of one unit of super chip	15000*3	45000
Remaining hours	Available hours – Hours consumed for production of one unit of super chip	45000-45000	0
Units to be produced of Okay chip	Remaining hours * hours required for the production of one unit of Okay chip	–	]

By considering the capacity of hours, the first priority will be provided to Super chip, and therefore production of Super chip will only be done.

Particulars	Formula	Amount
Sales prices		$145
Variable cost
Direct labour		$45
The variable cost of the super chip		$65
Contribution	(Sales-variable cost)	$35
Hours to produce		3
Contribution per hour of process control unit	Contribution / hours for production	$11.67
Contribution per hour of a super chip	Contribution / hours for production	$5.00
Higher Contribution per hour of process control unit if super chips are transferred	Contribution per hour of process control unit – Contribution per hour of a super chip	$6.67

Yes, the super chip should be transferred to the process control department as this production is providing higher Contribution per hour in comparison to Contribution per hour of the super chip. Thus, as per the viewpoint of overall profitability of the business, transfer of super chip to process control department will be a beneficial decision.

Particulars	Formula	In super chip is  not used	In super chip is used
Sales prices		$132	$145
Variable cost
Direct material		$70
Direct labour		$45	$45
The variable cost of the super chip		$0	$65
Contribution	(Sales-variable cost)	$17	$35
Hours to produce		3	3
Contribution per hour	Contribution / hours for production	$5.67	$11.67
Maximum amount process control department willing to pay	$6.00
The minimum amount required by super chip department	$5

By considering the above computations, it can be noticed that the maximum amount process control department willing to pay will be $6.00, i.e. higher contribution attained by making use of the super chip in the production. On the other hand, Super chip department will consider their opportunity loss as $5 can be earned by them in the market. Therefore, the price will be in between $6 and $5.  

In the case where labours hours are 60,000 then computation will be as follows:

Ideal hours available with	Available hours – Hours consumed for production of one unit of super chip	60000-45000	15000
Opportunity loss of contribution per hour of okay chip			$4

By considering the above computations, it can be noticed that maximum amount process control department willing to pay will be the same as previous $6.00. However, Super chip department will consider their opportunity loss of Okay chip instead of a super chip. It is because; with the available hour’s department will be able to satisfy the market demand, and still they will be having spare capacity of 15000 hours which is sufficient for the production of process control unit.   Therefore, a minimum amount expected the department will be $4 can be earned by them in the market.

References

Irvine, P.J., Park, S.S. and Y?ld?zhan, Ç., 2015. Customer-base concentration, profitability, and the relationship life cycle. The Accounting Review, 91(3), pp.883-906.

Kumar, V., 2015. Evolution of marketing as a discipline: What has happened and what to look out for. Journal of Marketing, 79(1), pp.1-9.

Lun, Y.V., Shang, K.C., Lai, K.H. and Cheng, T.C.E., 2016. Examining the influence of organizational capability in innovative business operations and the mediation of profitability on customer satisfaction: An application in intermodal transport operators in Taiwan. International Journal of Production Economics, 171, pp.179-188.

Rebelo, T. and Gomes, A.D., 2017. Is organizational learning culture a good bet? An analysis of its impact on organizational profitability and customer satisfaction. Academia Revista Latinoamericana de Administración, 30(3), pp.328-343.