6b.

Use differential analysis to decide whether to keep or drop customers

Why may a firm decide that it may be worth dropping a customer?

When making a determination whether or not to drop a customer, which costs should be traced to the
customer?

How are fixed costs traced to individual customers?

If a company feels that a customer may be costing more than the revenue brought to it by that
customer, they can use differential analysis to determine whether to keep or drop that customer. The
method for doing this is similar to the format used for making product line decisions except that in this
case, sales revenue, variable costs, and fixed costs are traced directly to customers rather than to
product lines. Since fixed costs are not directly traceable to specific customers, they must be allocated
among all the customers. Thus, although dropping a customer will eliminate variable costs associated
with that customer, such as cost of goods sold, shipping, maintenance, and support, the fixed costs will
continue but their allocation will be shifted to another customer.