Deck 13: Setting and Achieving Targets in the Customer Domain

Question 1

Customer profitability analysis requires that all selling, general, and administrative expenses be assigned to customers.

Answer 1

False

Question 2

A company trying to penetrate new markets is likely to refrain from assigning some of its selling, general, and administrative costs to specific customers.

Answer 2

True

Question 3

It is entirely possible that a customer who is profitable at the gross margin level may prove to be unprofitable when all costs associated with making and supporting sales are considered.

Answer 3

True

Question 4

It is not unusual to find that a high proportion of a company's profits are derived from a relatively small proportion of its customers.

Question 5

Once a customer has been identified as unprofitable, the only rational course of action for management is to drop or abandon that customer.

Question 6

Once identified, "business-value-added activities" and the costs associated with them should be eliminated because customers place no direct value on them.

Question 7

Joe, who is 6-feet and 6-inches tall, gladly pays an extra $100 for an airline seat that offers eight inches of additional legroom. For Joe, the extra legroom is a value attribute.

Question 8

Innovative firms that have created a significant competitive advantage over their rivals find that spending an additional dollar on value-adding activities generates far more than an additional dollar of revenue.

Question 9

Newly acquired customers are likely to be unprofitable because of the cost of the marketing and sales efforts necessary to acquire them.

Question 10

Of the four archetypal customers, those classified as "wealthy and demanding" are the most profitable because they are willing to pay high prices.

Question 11

A "passive customer" is relatively insensitive to price changes.

Question 12

Lifetime profitability should be the basis for deciding to retain or discourage a currently unprofitable customer.

Question 13

When performing a customer profit variance analysis, changing the assumption about a customer's overall volume of purchases to the actual amount, but leaving all other items at their planned level, will produce the customer market share variance.

Question 14

A favorable customer market share variance and unfavorable price variance would be entirely consistent outcomes.

Question 15

Nonfinancial measures of performance in the customer domain may be preferred to financial measures because they provide a more timely indicator of future financial performance.

Question 16

A useful measure of short-run customer profitability should account for which of the following costs?

A) Cost of the product or service provided to the customer.
B) Order processing and invoicing costs.
C) The costs of post-sale service calls.
D) All of the above.

Question 17

The key to performing quality customer profitability analysis is the ability to:

A) Disaggregate variance information by customer and product.
B) Successfully trace marketing, administrative, and post-sale costs to customers.
C) Articulate the firm's customer value proposition.
D) Develop value-based segments of customers.

Question 18

Knotts Woodproducts Company mills and distributes high-quality hardwoods to furniture manufacturers. Of the items listed below, which should be viewed as a cost traceable to a particular customer and therefore part of a customer profitability analysis?

A) Property taxes on the company's headquarters in Rocky Mount, N.C.
B) Salary of the company's chief financial officer.
C) Order processing and delivery costs.
D) Legal costs associated with corporate tax compliance.

Question 19

Knotts Woodproducts Company mills and distributes high-quality hardwoods to furniture manufacturers. For the purpose of measuring customer profitability, the company assigns its order processing and delivery costs to customers based on each customer's share of Knotts' total sales revenue. Of the following circumstances, which would render the resulting profitability measures misleading?

A) Customers purchase different mixes of Knotts' products.
B) All of Knotts' customers make use of the company's online ordering system.
C) All of Knotts' customers are located in North Carolina and southwestern Virginia.
D) One of Knotts' customers has adopted a just-in-time purchasing system. This customer places orders and receives shipments weekly, while other customers place and receive monthly orders.

Question 20

Analyses of customer profitability typically reveal that:

A) As few as 20% of customers yield 80% of a firm's total profits.
B) Most customers yield equal shares of a firm's total profits.
C) There is rarely an economic case to be made for abandoning a customer.
D) The largest customers as measured by revenue are the most profitable.

Question 21

When renting an automobile, members of Hertz Gold Club can proceed directly to a car of their choice, thereby avoiding spending time waiting on line and carrying out the transaction at a service counter. The Hertz Gold Club customer who knowingly pays a price premium for this service would view it as a:

A) Non-value-added cost.
B) Value attribute.
C) Business-value-added cost.
D) Customer value proposition.

Question 22

Southwest Airlines competes with American Airlines, Delta, and other legacy carriers by offering lower prices, greater convenience, on-time arrival, and friendly service. These items constitute Southwest's:

A) Customer value proposition.
B) Value-added costs.
C) Sources of leverage.
D) All of the above.

Question 23

Delta and Southwest Airlines compete for passengers on the route between Albany, N.Y., and Atlanta, Ga. Delta offers nonstop service while all of Southwest's flights stop in Baltimore, Md., and require a change of plane. Delta's nonstop flights constitute:

A) A value attribute.
B) A source of leverage.
C) Waste.
D) A business-value-added activity.

Question 24

The costs associated with non-value-added activities, such as rework, reduce profit because:

A) Such activities are typically performed for unprofitable customers.
B) Such activities are only undertaken because they are necessary for the firm to remain in business.
C) Such activities are not valued by the customer and produce no revenue.
D) Such activities are part of the customer value proposition.

Question 25

The cost associated with preparing, issuing, and collecting customer invoices is an example of:

A) A value-added activity and cost.
B) Business-value-added activity and cost.
C) Non-value-added activity and cost.
D) Waste.

Question 26

Suburban Systems, Inc., sells and services residential and commercial central heating and air conditioning systems. The company has decided to improve its financial performance by raising prices for customers who demand extraordinary amounts of post-sale service support. This tactic would be consistent with which method of increasing profitability per customer?

A) Acquiring new customers of the right type.
B) Enhancing the profitability of existing customers.
C) Improving retention of desirable customers.
D) None of the above.

Question 27

Joe Wilson is a frequent flier on Delta Airlines. Because of a long history of good experience with the airline, Joe always chooses Delta even when a competing carrier offers a lower fare or more convenient connections. Delta would view Joe as what type of customer?

A) Passive.
B) Predatory.
C) Wealthy demanding.
D) Bargain basement.

Question 28

Of the following customer types, which will likely exhibit the greatest sensitivity to a change in price?

A) Passive.
B) Predatory.
C) Wealthy demanding.
D) Unprofitable.

Question 29

Of the following types of customers, which would probably require the largest cost to service?

A) Wealthy demanding.
B) Passive.
C) Bargain basement.
D) Profitable.

Question 30

Before abandoning a customer who seems unprofitable in the short run, management must keep in mind that:

A) The customer may be a member of a value-based segment.
B) Not all costs assigned to an abandoned customer may be avoided, and revenue could be lost with little or no cost savings.
C) The customer's value proposition may be a poor match to the firm's value creation profile.
D) The customer possesses significant market power.

Question 31

Ideal customers:

A) Belong to a value-based segment.
B) Provide significant leverage.
C) Belong to the "bargain basement" class.
D) Sole source their purchases.

Question 32

Customers who: 1) satisfy all of their needs for products sold by the firm from the firm; 2) pay the full price needed to maintain desired profit margins; and 3) demand no special services are best described as:

A) Ideal.
B) Lifetime.
C) Predatory.
D) Bargain basement.

Question 33

Improving customer retention may have little or no effect on current period profits, but will have a significant effect on future profits because:

A) Over time, customers can be moved into a value-based segment.
B) Over time, predatory customers can be converted into passive customers.
C) Many non-value-added costs will be reduced by extending the duration of the customer relationship.
D) Leverage diminishes with the length of the customer relationship.

Question 34

One of the goals of variance analysis in the customer domain is to:

A) Identify ideal customers.
B) Disaggregate the company's overall profit variance by customer.
C) Improve customer retention.
D) Attract new customers of the right type.

Question 35

Endeavour Company is Morse Products' largest customer. A variance analysis of customer profitability prepared by Morse for Endeavour Company revealed a favorable customer purchase volume variance and an unfavorable market share variance. This means that:

A) Endeavour purchased less than Morse planned.
B) Morse increased its share of Endeavour's business but Endeavour's total purchases declined.
C) Endeavour's purchases of the products sold by Morse exceeded the amount budgeted by Morse, but a smaller fraction of those purchases than expected were from Morse.
D) Endeavour Company had a positive impact on Morse's profitability for the period analyzed.

Question 36

Blake Industries sells security systems and monitoring services to commercial clients. Blake regularly prepares variance analyses of customer profitability. Recently, it discovered that one of its largest clients purchased more security products and monitoring services than Blake had budgeted, and that Blake had received a larger share of this business than it had expected. The client was less costly to service than Blake had expected, resulting in a favorable cost spending variance. Nonetheless, the total profit variance associated with this customer was unfavorable. The variance results suggest that:

A) The customer demanded and received large price discounts from Blake.
B) The customer made an unusual number of requests for service on the systems installed by Blake.
C) Invoicing costs associated with this customer were greater than budgeted.
D) This customer was paid a larger number of sales calls from Blake's staff than the company had budgeted.

Question 37

If a particular customer requires an unusually large amount of attention from your company's sales staff, it will be brought to your management's attention by:

A) An unfavorable purchase volume variance.
B) An unfavorable market share variance.
C) An unfavorable price variance.
D) An unfavorable cost spending variance.

Question 38

Alpha Company provides tax planning and consulting services. Last year, Alpha captured a larger than anticipated share of Mega Company's purchases of such services. In a variance analysis of customer profitability, this difference will be noted by:

A) A favorable customer market share variance.
B) An unfavorable customer market share variance.
C) A favorable customer purchase volume variance.
D) An unfavorable customer purchase volume variance.

Question 39

In its strategy map, Southwest Airlines lists the following items: "time on the ground," "on-time departures," and "information system availability." These three nonfinancial performance measures are:

A) Value propositions.
B) Differentiators.
C) Sources of leverage.
D) Business-value-added activities.

Question 40

Nonfinancial measures of performance in the customer domain are important because:

A) They are often leading indicators of financial success in the future.
B) They are more easily measured and monitored than financial indicators.
C) They are easily disaggregated by customer and product line.
D) They are not subject to gamesmanship by management.

Question 41

Cooper Company is trying to improve its customer profitability analysis by tracing more of its indirect costs to customers. The company has performed an activity analysis and has identified three indirect cost pools: order taking, sales calls, and product deliveries. Cooper Company has assembled data regarding the costs of these three activities and the amounts consumed by its four customers. The data is presented in the table below:
Required:
Develop an activity-based cost rate for each activity and use it to trace the costs to the individual customers.

Question 42

Use the following information to determine which customer is more profitable to service. Calculate both total profit and profit as a percentage of revenue for each customer.

Question 43

Biodex, Inc., produces a single product, an herbicide called GrassNoMore. One of Biodex's key customers is the Amontillado Winery Company, which uses the product to control weeds growing between rows of grapevines. GrassNoMore and competing products are sold by the pound. The table below contains information Biodex has assembled regarding sales made to Amontillado Winery Company in the most recently concluded year.
Sales of GrassNoMore to Amontillado Winery Company
Required:
Compute the following variances and show that they reconcile to the total favorable profit variance of $164,600:
Customer Purchase Volume Variance
Customer Market Share Variance
Price Variance
Cost Spending Variance