Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 46

Customer Profitability

SkiBlu, Ltd., divides its customers into Gold customers and Silver customers. The company has one full-time customer representative per 1,000 Gold customers and one full-time customer representative per 10,000 Silver customers. Customer representatives receive salaries plus bonuses of 10 percent of customer gross margin. SkiBlu spends 90 percent of its promotion costs on Gold customers to encourage their loyalty.

Customer Costs	Total	Gold	Silver
Number of customers&	100,000	30,000	70,000
Average customer representative salary		$35,000	$35,000
Promotion costs	$4,000,000
Average gross margin per customer&		$ 220	$ 70

Required

a.What is the excess of gross margin over customer costs for each category of customer?

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b.Write a short memo that evaluates customer profitability.

Step 1 of 2

a.?

Customer Costs	Gold	Silver
Number of customers	30,000	70,000
Number of customer representatives	30	7
Average gross margin per customer	$220	$70
Total gross margin ($220 x 30,000; $70 x 70,000)	$6,600,000	$4,900,000
Customer representative salary (@ $35,000 per customer representative)	1,050,000	245,000
Customer representative bonus (@ 10% of gross margin)	660,000	490,000
Promotion costs (90% gold; 10% silver)…	3,600,000	400,000
Excess of gross margin over customer cost	$1,290,000	$3,765,000