Northern Ltd produces one product specifically for tropical North Island. It is a new form of

tropical- level insect repellent that is odourless and leaves no trace to the eye, feel or touch on the

skin of the user once applied. It does not have any adverse effects on the eyes should the user sweat

after having applied it to their face. The repellent is made from all-natural products. The product

price is targeted at the mid-range of the insect repellent range yet performs at the high-end. This

represents a marketing edge that will be tested prior to moving into the global market. Simon

Smith, the founder and owner of the company, has asked his management accountant, Robert

Chang, to provide a customer profitability analysis of two customers of similar levels of product

volume, one operating in Whangarei and the other in North Shore.

Chang identified two similar customers to which the product was sold at $3.50 per unit. The

variable cost per unit is $1.75.

North Shore customer:

20 orders per year at an average of 150 units per order.

Each order must be delivered within 24 hours of it being received.

Any problems at all associated with the delivery and the condition of goods received results in a

complaint to Wally via the Sales Manager, Tony White. There have been 5 such complaints in the

period under analysis.

Whangarei customer:

5 scheduled orders per year at an average of 600 units per order.

During the wet season this was reduced to 4 orders by combining the November and January

deliveries due to an abnormally long dry season, allowing the November delivery to be delayed to

December; and a predicted wetter than usual wet season, prompting the January delivery to be

brought forward to December.

There are never any complaints from the Whangarei customer. Cost of activities: The activity-

based costing system identifies the following activities and associated per unit cost burdens:

1. Cost per order of $20.

2. Delivery cost is $200

3. Cost per complaint is $200.

Required:

(a) Complete a customer profitability analysis of the two customers. ( 9 marks)

(b) Using the analysis, evaluate the customers' profitability outcomes.

Answer rating: 100% (QA)

a To complete the customer profitability analysis we need to calculate the revenue variable costs an... View the full answer