Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.
Engle Equipment: Sales Revenue $215,000 Cost of goods sold 95,000 General selling costs 30,000 General admin costs 21,000
Midwest Refrigeration: Sales revenue $154,000 cost of goods sold 68,000 general selling costs 21,500 general admin costs 15,050
Cost-driver data used by the firm and traceable to Engle and Midwest are:
Customer Activity Cost Driver Pool Rate
Sales activity Sales visits $900
Order Taking Sales orders 250
Special Handling units handled 30
Special Shipping Shipments 600
Customer Activity Engle Equip. Midwest Refrig.
Sales Activity 8 visits 5 visits
Order taking 17 orders 22 orders
Special handling 600 units 550 units
Special shipping 19 shipments 30 shipments
Required:
A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin.
C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.