Problem:
ABC, wholesale, customer profitability. Ramirez Wholesalers operates at capacity and sells furniture items to four department-store chains (customers). Mr. Ramirez commented, "We apply ABC to determine product-line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability as well." Ramirez Wholesalers sends catalogs to corporate purchasing departments on a monthly basis. The customers are entitled to return unsold merchandise within a six-month period from the purchase date and receive a full purchase price refund. The following data were collected from last year's operations:
|
Chain
|
|
1
|
2
|
3
|
4
|
|
Gross sales
|
$55,000
|
$25,000
|
$100,000
|
$75,000
|
|
Sales returns:
|
|
|
|
|
|
Number of items
|
101
|
25
|
65
|
35
|
|
Amount
|
$11,000
|
$ 3,500
|
$ 7,000
|
$ 6,500
|
|
Number of orders:
|
|
|
|
|
|
Regular
|
45
|
175
|
52
|
75
|
|
Rush
|
11
|
48
|
11
|
32
|
Ramirez has calculated the following activity rates:
|
Activity
|
Cost-Driver Rate
|
|
Regular order processing
|
$25 per regular order
|
|
Rush order processing
|
$125 per rush order
|
|
Returned items processing
|
$15 per item
|
|
Catalogs and customer support
|
$1,100 per customer
|
Customers pay the transportation costs. The cost of goods sold averages 70% of sales.
Determine the contribution to profit from each chain last year. Comment on your solution.