Business Levels : The 80-20 Rule

1662 Words Feb 19th, 2016 7 Pages
(6-4) In business, the 80-20 rule refers to the common finding that when a business levels its products and/or customers from the highest sales volume to the lowest, they tend to find that the 20% top-selling products/customers are responsible for about 80% of the total sales. Therefore, 20% of the cause/activities/product will attribute to 80% of the effect/outcome/sales.
(6-23): Salespersons’ incentives, customer profitability
(a) To determine which customer is more profitable for the company, several different factors will have to be assessed: the number of total sales for each customer subtracting the cost of goods sold – that will give the gross margin. The MDSA expenses will be subtracted from the gross margin to give the overall operating profit. Those numbers will determine if Donner or Carlson is more lucrative:
Carlson: $450,000 (sales) - $180,000 (cost of goods sold) = $270,000 (gross margin) - $320,000 (MSDA expenses) = -$50,000 (operating deficit)
Donner: $400,000 (sales) - $80,000 (cost of goods sold) = $320,000 (gross margin) - $65,000 (MSDA expenses) = $255,000 (operating profit)
Therefore, we can see that Donner is $305,000 more profitable
(b) If the Chan Company incorporates a sales incentive scheme of a 2% sales revenue commission comparatively to a 4% commission pay on profit, the outcome can be measured below: Carlson Donner Cost to Chan
Sales $450,000 $400,000
Commission on sales revenue 2% (x 0.02) 2% (x 0.02)
Total on sales revenue $9,000…
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