Question 2: (22 marks)

a) How might customer profitability analysis be used to improve organisational performance? Suggest and explain which costing approach can be used to implement customer profitability analysis? (6 marks)

b) Hector Gonzales runs the Floral Art Company, which supplies floral arrangements to three large supermarket chains throughout Australia. Management has become concerned about the rising costs associated with the process and dispatch of orders. An activity analysis of the indirect costs identified the following customer-related costs.

		Estimated indirect costs	Total expected use of cost driver*
				Use of cost driver Supermarket customer
Acitvity cost pool	Cost driver
				1	2	3
Orders processing	Number of orders	$200,000	450	300	100	50
Returns processing	Number of returns	$50,000	100	50	25	25
Delivery	Number of deliveries	$100,000	700	400	200	100
Rush orders	Number of rush orders	$70,000	50	10	20	20
Sales visits	Number of visits	$20,000	100	50	25	25

Required:

1. Assign the activity costs to each of the three customers (6 marks)

1. Calculate the contribution for each customer if the sales pattern for each is as follows: (6 marks)

Supermarket customer	Sales revenue**
1	$350,000
2	$160,000
3	$210,000
**Selling price is marked up 50% on direct cost of flowers.

Hints: conduct a customer profitability analysis based on the above customer related indirect costs.

1. What conclusion can we draw from the customer profit analysis? Advise the management of the Floral Art Company as to whether any changes should be made in its relationships with customers. Advise Hector as to how he should go about executing these changes. (4 marks)