Sales and Customer Service Costs

Better Essays

Rev. June 17, 2009

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As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor’s sales manager talking with the general manager of Saver Superstore, one of JBI’s largest customers. Then, that morning,
Johnson’s sales manager, Marsha Ketchum, had mentioned that, during her visit
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I had Jim pull some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look.” Jim Thomas in accounting, who was also in the meeting, had prepared a report (Exhibit 1), which Johnson laid on the table for the others to look at.
Thomas explained how the accounting group compiled the numbers:
For each customer, we just pull the revenues right out of the accounting system.
We know what they ordered and what we shipped, and we know what price we charge each customer, so that part is pretty easy. And we know that the cost per case, excluding our customer service costs, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may remember that we’ve talked about how hard it is to trace our customer service costs to any particular customer. Our customer service costs run about $1.2 million a year, roughly 10% of revenues. To make things easy, we allocate those to each customer based on its share of the company’s total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer. Johnson looked at the numbers and said:
I don’t think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a
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