Adopting the Profit-Maximizing Production Plan

650 Words3 Pages
1. The gross margin for each customer is as follows: 1. Gross Margin P Q R T Bottles Sold 50000 210000 1460000 94000 List Selling Price 0.6 0.6 0.6 0.6 Actual Selling Price 0.6 0.59 0.55 0.54 COGS 0.5 0.5 0.5 0.5 Gross Margin 16.67% 15.25% 9.09% 7.41% 2. The operating profit for each customer is as follows: 2. Operating Profit P Q R T Bottles Sold 50000 210000 1460000 94000 Actual Selling Price 0.6 0.59 0.55 0.54 Revenue 30000 123900 803000 50760 COGS 25000 105000 730000 47000 Gross Margin 5000 18900 73000 3760 less operating costs Purchase Orders 1500 2500 3000 3000 Sales Visits 160 320 480 240 Deliveries 280 240 360 1600 Hot-hot runs 0 0 0 300 Handling 1000 4200 29200 1880 Total Operating Costs 2940 7260 33040 7020 Operating Profit 2060 11640 39960 -3260 3. Using activity-based costing, it is evident that the most profitable customer is R, which is also the largest customer. This company contributes most of the company's total profit. The figures also reveal that while Q and P contribute profit to the company, T does not. This customer costs the company $3260 in loss. This loss is attributable to a couple of key factors. One is the distance to the customer, which is by far the highest. The other is the high number of purchase orders and deliveries relative to the number of total bottles sold. Customer T is making a lot of small orders and the result is that the
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