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Social Science Clinic => Accounting => Topic started by: hgjjghgjh on Feb 5, 2023

Title: It may appear that all unprofitable customers should be dropped. However, before any action is ...
Post by: hgjjghgjh on Feb 5, 2023

Question 1

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 2

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.

Title: It may appear that all unprofitable customers should be dropped. However, before any action is ...
Post by: gyvette on Feb 5, 2023

Answer 1

a.	Customer net profit = Customer revenues - Cost of goods sold - Allocated selling

expenses

b.	Customer profit margin = Customer net profit ÷ Customer revenues

Answer 2

Answers will vary. Some examples include:

a.	If an unprofitable customer takes initiative to become profitable, the actions may

increase the customer's efficiency in placing and receiving orders, possibly saving money for the customer. The customer may upgrade processes that may require cash outflow up front but improve processes in the long run. If customers do not make needed changes, the company may raise prices to create a profitable customer. A higher cost to the customer will negatively affect profit. If the customer cannot become profitable and is dropped by the company, the customer is faced with finding the product at another supplier or, at worst, not being able to purchase the needed items.

b.	The effect on other customers may be negative or positive. For example, if an

unprofitable customer is requiring too much time from the company, less time will be available to service profitable customers. This may negatively impact the profitable customer. If an unprofitable customer has frequent and short-notice delivery requests, if a profitable customer needs a delivery his or her delivery may not be made in a timely manner. If an unprofitable customer is forced to pay a higher price in an effort to convert the customer to a profitable one, the profitable customers will not have the same price increase and will be able to sell the same product at a lower price to its customers, possibly increasing sales. If an unprofitable customer is dropped, profitable customers may receive additional customers.

c.	If the company drops an unprofitable customer, the effect on the company may be that

its overall profitability will increase even through total sales revenue will decrease. If other profitable customers simply take the unprofitable customer's business, revenue will remain at the same level. Managers will have more resources to serve profitable customers, and overall customer satisfaction and sales will eventually increase. If the company can turn an unprofitable customer into a profitable one by working with the customer, the relationship will be strengthened.