Bizzan Manufacturing makes a component they call P14-31. This component is manufactured only when ordered by a customer, so Bizzan keeps no inventory of P14-31. The list price is $100 per unit, but customers who place “large” orders receive a 10% discount on price. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of ten. When a customer orderis not a multiple of ten, Bizzan uses a full case to pack the partial amount left over (e.g., if Customer C orders 25 units, three cases will be required). Customers pick up the order so Bizzan incurs costs of holding the product in the warehouse until customer pickup. The customers are manufacturing firms; if the component needs to be exchanged or repaired, customers can come back within ten days for free exchange or repair.
The full cost of manufacturing a unit of P14-31 is $80. In addition, Bizzan incurs customer-level costs.
Customer-level cost-driver rates are:
Order taking.............. $380 per order
Product handling........... $ 10 per case
Warehousing (holding finished product)... $ 55 per day
Rush order processing $520 per rush order
Exchange and repair costs......... $ 40 per unit
Information about Bizzan’s five biggest customers follows:
The salesperson gave customer C a price discount because, although Customer C ordered only 1,200 units in total, 12 orders (one per month) were placed. The salesperson wanted to reward customer C for repeat business. All customers except E ordered units in the same order size. Customer E’s order quantity varied, so E got a discount some of the time but not all the time.
1. Calculate the customer-level operating income for these five customers. Use the format in Exhibit 16-2. Prepare a customer profitability analysis by ranking the customers from most to least profitable, as in Exhibit 16-2.
2. Discuss the results of your customer profitability analysis. Does Bizzan have unprofitable customers? Is there anything Bizzan should do differently with its five customers?

  • CreatedJuly 31, 2015
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