FACUALTY OF COMMERCE

BUSINESS MANAGEMENT

MASTER OF COMMERCE IN STRATEGIC MANAGEMENT AND

CORPORATE GOVERNANCE

NAME CALTON KANORUMBWE

REGISTRATION NUMBER R143232H

MODULE Management Accounting

CODE MBM 701

LECTURER Dr S Mavhiki
Customer Profitability Analysis

Aqua Distribution buys bottled water at $12 per case and sells it to retail clients at $14.40 per
case. Data pertaining to four customers are as follows:

Quinn Ralph Sutlife Thorne

Cases sold 8 750 60 800 31 800 3 900
Actual price $14.16 $13.20 $13.92 $12.96
Number of orders 25 30 25 30
Customer visits 3 6 2 3
Deliveries 30 60 40 20
Km/delivery 4 3 8 40
Expedited deliveries 0 0 0 1
The firm estimates the following rates:
Number of orders $100 per order (number of cases in an order varies)
Customer visits $80 per visit
Delivery $2 per delivery km travelled
Production handling $0.50 per case sold
Expedited deliveries $300 per incident
Evaluate customer profitability and suggest remedial actions if necessary.
Profitability Analysis
Quinn ($) Ralph (4) Sutlife ($) Thorne ($)
Sales (W1) 123900 802560 442656 3900
Total Revenue 123900 802560 442656 50544
(A)
less Costs
Purchases (W2) 105000 729600 381600 46800
Ordering costs 2500 3000 2500 3000
(W3)
Visiting costs 240 480 160 240
(W4)
Delivery costs 240 360 640 1600
Handling costs 4375 30400 15900 1950
Expedited 0 0 0 300
delivery

Total Costs (B) 112355 763840 400800 53890

Profit (A-B) 11545 38720 41856 (3346)

Sutlife have the highest profitability followed by Ralph and Quin and Thorne negative profit.
In order to increase profits the firm should undergo pricing process improvement, changing
order size or expanding sales of profitable customers. In addition to, Management have to
develope a long term relationships, customer retention and loyalty programmes. Aqua
Distributors may increase their revenue by offering discounts, and offer other products and
service to entrench profitable customer
Thorne is a least profitable customer , the company can critically analyse and come up with
the strategies such as reducing costs, increasing prices per a case.. This can be done
through renegotiating terms of delivery,pricing. Reducing cost associated internal process is
vital decreasing cost of serving. In line with, managers have to try and bring Thorne into at
least break even point , since these unprofitable customers might attract profitable
customers, therefore there is need to keep them for goodwill sake, Alternatively , the
manager might eliminate ceasing supply ut has to be done in a way that can not damage
company's its reputation. all resources can be focused to profitable customers.
Ralph have highest number of sales compared to Sutlife, whilst less profitable than Sutlife
this entails that the company is incuring high costs in providing services to Ralph, hence the
manager should implement cost reduction processes for example reducing handling costs
and much focus have to be placed on ways to streamline internal processes in order to
attain increased revenue.