ABC, wholesale, customer profitability. Ramirez Wholesalers ...

[charchew]

ABC, wholesale, customer profitability.
 
  Ramirez Wholesalers operates at capacity and sells furniture items to four department-store chains (customers). Mr. Ramirez commented, We apply ABC to determine product-line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability as well. Ramirez Wholesalers sends catalogs to corporate purchasing departments on a monthly basis. The customers are entitled to return unsold merchandise within a six- month period from the purchase date and receive a full purchase price refund. The following data were collected from last year's operations:
 
  Ramirez has calculated the following activity rates:
 
  Customers pay the transportation costs. The cost of goods sold averages 80 of sales.
 
  Required:
  Determine the contribution to profit from each chain last year. Comment on your solution.

Question 2

The amounts that the business entity owes its creditors are referred to as
 a. assets.
  b. liabilities.
  c. owner's equity.
  d. revenues.
  e. expenses.

[xMRAZ]

Answer to Question 1

Chain
1 2 3 4
Gross sales 50,000 30,000 100,000 70,000
Sales returns 10,000 5,000 7,000 6,000
Net sales 40,000 25,000 93,000 64,000
Cost of goods sold (80) 32,000 20,000 74,400 51,200
Gross margin 8,000 5,000 18,600 12,800
Customer-related costs:
Regular orders
20  40; 150; 50; 70 800 3,000 1,000 1,400
Rush orders
100  10; 50; 10; 30 1,000 5,000 1,000 3,000
Returned items
10  100; 26; 60; 40 1,000 260 600 400
Catalogs and customer support 1,000 1,000 1,000 1,000
Customer related costs 3,800 9,260 3,600 5,800
Contribution (loss) margin  4,200 (4,260)  15,000  7,000
Contribution (loss) margin as
percentage of gross sales 8.4 (14.2) 15.0 10.0

The analysis indicates that customers' profitability (loss) contribution varies widely from (14.2) to 15.0. Immediate attention to Chain 2 is required which is currently showing a loss contribution. The chain has a disproportionate number of both regular orders and rush orders. Ramirez should work with the management of Chain 2 to find ways to reduce the number of orders while maintaining or increasing the sales volume. If this is not possible, Ramirez should consider dropping Chain 2 if it can save the customer-related costs.
Chain 1 has a disproportionate number of the items returned as well as sale returns. The causes of these should be investigated so that the profitability contribution of Chain 1 could be improved.

Answer to Question 2

B