XYZ has 5 customers that represent all of its $20,000,000 in sales. Your activity-based costing system can
Question:
XYZ has 5 customers that represent all of its $20,000,000 in sales. Your activity-based costing system can allocate all costs to key activities incurred in connection with serving your customers, except $2,000,000 of general and administrative expenses that include, for example, the CEO's salary and bonus.
With profit margins declining in recent years, XYZ's CEO is concerned that the cost of winning contracts and maintaining relationships with its top five clients may be getting out of control. You have been hired to carry out a profitability analysis of the 5 clients.
The first cost associated with clients is the 5% commission paid to sellers based on the total sales of each client.
The rest of the customer service expenses are related to the following five activities:
ACTIVITY | TOTAL COST | CAUSE OF COSTS | TOTAL ACTIVITY |
Client visits | $350,000 | # of visits | 350 visits |
Product adjustments due to customer requests | $96,000 | # of adjustments | 60 adjustments |
Contact by email or phone | $52,000 | # of contacts | 520 contacts |
Promotions events | $252,000 | # of events | 84 events |
Use of corporate jet to visit customers | $61,000 | # flight hours | 61 flight hours |
This is the information related to the sales of the 5 clients:
CLIENT | SALES | COGS |
ABC, Inc. | $5,500,000 | $4,180,000 |
WAAC, Corp. | 4,000,000 | 3,040,000 |
Corporation TAC | 3,900,000 | 2,964,000 |
XZS, Co. | 3,500,000 | 2,660,000 |
AAA, LLC | 3,100,000 | 2,356,000 |
1. Prepare a profitability analysis for the 5 clients in Excel showing gross profits minus all other expenses that can be directly assigned to the five clients.
2. Arrange the 5 clients from most profitable to least profitable. Explain whether customers with the highest sales (purchases) are always the most profitable.
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young