Question

Customer profitability in a manufacturing firm. Mississippi Manufacturing makes a component called B2040. This component is manufactured only when ordered by a customer, so Mississippi keeps no inventory of B2040. The list price is $112 per unit, but customers who place “large” orders receive a 10% discount on price. The customers are manufacturing firms. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of 10. If the component needs to be exchanged or repaired, customers can come back within 14 days for free exchange or repair.

The full cost of manufacturing a unit of B2040 is $95. In addition, Mississippi incurs customer-level costs. Customer-level cost-driver rates are:

 

$360 per order
$15 per case
$560 per rush order
$50 per unit
Order taking
Product handling
Rush-order processing
Exchange and repair costs
Information about Mississippi's five biggest customers follows:
A
B
D
Number of units purchased
4,400
8,100
5,400
1,800
10%
1,200
Discounts given
10%
10%
10% on half the units
Number of orders
8
16
50
20
18
Number of cases
810
540
180
120
440
Number of rush orders
2
8
Number of units exchanged/repaired
200
18
70
13
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Transcribed Image Text:$360 per order $15 per case $560 per rush order $50 per unit Order taking Product handling Rush-order processing Exchange and repair costs Information about Mississippi's five biggest customers follows: A B D Number of units purchased 4,400 8,100 5,400 1,800 10% 1,200 Discounts given 10% 10% 10% on half the units Number of orders 8 16 50 20 18 Number of cases 810 540 180 120 440 Number of rush orders 2 8 Number of units exchanged/repaired 200 18 70 13
All customers except E ordered units in the same order size. Customer E's order quantity varied, so E got a
discount part of the time but not all the time.
Calculate the customer-level operating income for these five customers. Use the format in Exhibit 14-3.
Prepare a customer-profitability analysis by ranking the customers from most to least profitable, as in
Exhibit 14-4.
Required
1.
2. Discuss the results of your customer-profitability analysis. Does Mississippi have unprofitable customers?
Is there anything Mississippi should do differently with its five customers?
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Transcribed Image Text:All customers except E ordered units in the same order size. Customer E's order quantity varied, so E got a discount part of the time but not all the time. Calculate the customer-level operating income for these five customers. Use the format in Exhibit 14-3. Prepare a customer-profitability analysis by ranking the customers from most to least profitable, as in Exhibit 14-4. Required 1. 2. Discuss the results of your customer-profitability analysis. Does Mississippi have unprofitable customers? Is there anything Mississippi should do differently with its five customers?
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