Read the Customer Profitability Analysis section and illustration.

1. What are your thoughts about the results of customer profitability analysis at the Patio Grill Company? Do you understand the results? Are you surprised?

2. Think about your place of business (higher education). Do you think a Customer Profitability Analysis should be performed? Do you have situations where you think you (or the company) spends more time and resources with certain customers? Do you think it is affecting your company's profitability?

Customer-Profitability Analysis Learning Objective 5-9 Explain and execute a customer-profitability analysis. It is quite possible for a company to have profitable products and, at the same time, incur customer-related costs that make certain customer relationships unprofitable. Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers. Suppose, for example, that customer X frequently changes its orders after they are placed, but customer Y typically does not. Then the costs incurred in updating sales orders for changes should be recorded in a manner that reflects the fact that customer X is more responsible for those activities and costs than is customer Y. An effective cost management system should allow managers to derive such cost details. Many factors can result in some customers being more profitable than others. Customers that order in small quantities, order frequently, often change their orders, require special packaging or handling, demand faster delivery, or need special parts or engineering design generally are less profitable than customers who demand less in terms of customized services. If managers have a good understanding of which customers are generating the greatest profit, they can make more-informed decisions about customer service. Moreover, this allows customers to be educated as to the costs they are causing when demanding special services. In many cases, customers' behavior can be changed in a way that reduces costs to the supplier. Then these cost savings can be shared by the supplier and the customer. The task of assigning costs to customers is a challenge. A system must be in place that enables the company to identify which customers are using customer support services and how frequently they do so. How much time must the company spend on a customer to make the sale and Page 190 to provide ongoing support services? These costs are in addition to the cost of manufacturing the product or initially providing a service for the customer. Mustration of Customer-Profitability Analysis Patio Grill To illustrate customer-profitability analysis, let's focus again on Patio Grill Company. Two more years have company passed, and the company has successfully implemented its activity-based costing system in its Denver plant. At a recent strategy meeting with her senior management team, Patio Grill Company's president and CEO expressed interest in assessing the profitability of the entire company's various customer relationships. She found support for the idea from the director of cost management, who had been reading about customer-profitability analysis in some of his professional journals. The company's marketing manager also expressed interest in customer-profitability analysis, since he was concerned about the profitability of a couple of Patio Grill Company's customers in particular. We have a few customers who seem to want the moon and the stars when it comes to customer service," he complained. I know the customer is always right and all, but you really have to wonder if we're making any money from a couple of these customers, what with all the extra design and packaging they demand. And some of our other customers seem to require an awful lot of extra attention in sales calls, order processing, and billing. If we had a better idea of each customer's profitability, it would help our marketing and sales staffs to focus their efforts