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

Exercise 47

Customer Profitability

Lighthouse Company divides its customers into Premium customers and Standard customers. The company has one full-time customer representative per 100 Premium customers and one full-time customer representative per 1,000 Standard customers. Customer representatives receive salaries plus bonuses of 1 percent of customer gross margin. Lighthouse spends 80 percent of its promotion costs on Premium customers to encourage their loyalty.

Customer Costs	Total	Premium	Standard
Number of customers	10,000	2,000	8,000
Average customer representative salary		$60,000	$60,000
Promotion costs	$1,000,000
Average gross margin per customer&		$ 1,500	$ 150

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 5

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.