The sales manager of Flying Carpets, a carpet manufacturer and wholesaler, is analyzing the profitability of two of the company’s customers. One customer, a boutique store, purchases small orders for individual clients and often wants a custom-run carpet. The other customer, a discount retailer, buys large lots of standard carpets. The sales manager is concerned that providing services for the boutique store is costing more than the contribution margin from its business.
The accountant has gathered the following relevant information for the past year. All employees are guaranteed a 40 hour work week. Sales representatives are paid $20 per hour, and the production line supervisor is paid $18 per hour. Employee benefits and human resource services amount to approximately 50% of hourly wages. The discount retailer picks up large lots of carpets four times a year. Deliveries to customers of the boutique store must be made as the carpets are completed.

A. Calculate the profitability for each customer.
B. Flying Carpets would like to retain the Boutique Store as a customer because its clients’ homes are often featured in the local lifestyle magazine and the publicity is free advertisement. What suggestions can you make for negotiations with the customer about service costs?
C. If Flying Carpets can replace either customer with other business, what is your recommendation?Explain.

  • CreatedJanuary 26, 2015
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