Customer profitability, customer-cost hierarchy Ramish Electronics has only two retail and two wholesale customers. Information relating to each customer for 2009 follows (in thousands):

Ramish’s annual distribution-channel costs are $38 million for wholesale customers and $7 million for retail customers. Its annual corporate-sustaining costs, such as salary for top management and general administration costs, are $65 million. There is no cause-and-effect or benefits-received relationship between any cost-allocation base and corporate-sustaining costs. That is, corporate-sustaining costs could be saved only if Ramish Electronics were to completely shut down.

1. Calculate customer-level operating income using the format in Exhibit 14-5.

2. Prepare a customer-cost hierarchy report, using the format in Exhibit 14-6.

3. Ramish’s management decides to allocate all corporate-sustaining costs to distribution channels: $51 million to the wholesale channel and $14 million to the retail channel. As a result distribution channel costs are now $89 million ($38 million + $51 million) for the wholesale channel and $21 million ($7 million + $14 million for the retail channel. Calculate the distribution-channel-level operating income. On the basis of these calculations, what actions, if any, should Ramish’s managers take? Explain.

Wholesale Customers North America South America Big Sam Wholesaler $580,000 Retail Customers World Market Wholesaler Stereo $130,000 $100,000 7,000 118,000 Revenues at list price $420,000 Discounts from list prices Cost of goods sold Delivery costs Order processing costs Costs of sales visits 500 90,000 125 130 455,000 650 1,000 5,500 325,000 450 800 200 200 2,300 1,350 5,600