Christen Granite sells granite counter tops to the construction industry. Christen Granite has three customers: Homebuilders, a small construction company that builds private luxury homes; Kitchen Constructors, a company that designs and builds kitchens for hospitals and hotels; and Subdivision Erectors, a construction company that builds large subdivisions in major metro suburbs. Following are Christen Granite's revenue and cost data by customer for the year ended December 31, 2016:

Operating costs include order processing, sales visits, delivery, and special delivery costs. Christen estimates that revenue and costs will increase as follows on an annual basis:

Required
1. Calculate operating income per customer for 2016 and for each year of the 2017-2021 period.
2. Christen estimates the value of each customer by calculating the customer's projected NPV over the next five years (2017-2021). Use the operating incomes calculated above to compute the value of all three customers. Christen uses a 10% discount rate.
3. Recently, Kitchen Constructors (KC), Christen's most valuable customer, has been threatening to leave. Lawson Tops, Christen's fiercest competitor, has offered KC a greater discount. KC demands a 20% discount from Christen if the latter wants to keep KC's business. At the same time, Christen reevaluates the KC account and anticipates annual revenue increases of only 5% thereafter. Should Christen grant KC the 20% discount? What is the five-year value of KC after incorporating the 20% discount? What other factors should Christen consider before making a final decision?
4. What are the possible adverse effects of caving in to KC's pressure?

Transcribed Image Text:

Kitchen Subdivision Homebuilders Constructors Revenues Cost of goods sold Operating costs $54,000 26,400 12,000 S390,000 216,000 90,000 1,032000 660,000 282,000 Kitchen Subdivision Erectors 8% 4% 4% Homebuilders Constructors Revenues Cost of goods sold Operating costs 5% 496 4% 15% 4% 4%