Argos Ltd manufactures a product called the jumbuck and it sells it to various merchandising firms such as The Jumbuck Place (JP), The House Of Jumbucks(HOJ), Jumbucks For Us(JFU), Super Jumbucks(SJ), Mega Jumbucks(MJ) and Aussie Jumbucks(AJ).
The list price of the jumbuck is $55 and the full manufacturing cost to make a jumbuck is $32. Salespeople receive a commission based on the number of orders written not on sales revenue generated or number of units sold. Salespeople receive a commission of $22 per order written.
Argos makes products based on anticipated demand. It carries an inventory of jumbucks so that rush orders do not result in any increase in the manufacturing cost. Argos ships finished product to the customer at no additional charge to the customer for either a regular or an expedited delivery. Argos has considerably higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to Argos and these returns are subtracted from gross revenue. Customers are not charged a restocking fee for returns.
Expected and actual customer level cost driver rates are :
Order taking(excluding sales commission) $25 per order
Product handling $2 per unit
Delivery $0.40 per mile driven
Expedited (rush) delivery $300 per shipments
Restocking $80 per returned shipment
Visits to customers $125 per customer
Because salespeople are paid $22 per written order they frequently break up their larger orders received into multiple smaller orders.
Information about Argos Ltd's clients are :
JP HOJ JFU SJ MJ AJ
Total number of units purchased 250 550 320 130 450 1200
Number of orders received 3 15 3 4 5 15
Number of actual orders written 6 15 8 7 20 30
Number of kilometres driven for deliveries 420 620 470 280 806 900
Number of units returned 20 35 0 0 40 60
Number of returned shipments 2 1 0 0 2 6
Number of expedited deliveries 0 6 0 0 2 5
Required:
(a) Calculate the customer level operating profit for each of the above merchandising firms based on the actual number of orders written.
(b) Prepare a customer profitability analysis ranking the firms from most to least profitable showing the level of net operating profit, revenue and revenue/profit by percentage.
(c) Recalculate the customer level operating profit based on the number of actual orders received, assuming that sales commission will also be based on this number of orders received.
Discuss the differences between the profit for the various firms and those for the firms in part (a) when actual orders written was used.
(d) Discuss what should be done to improve the profitability of the firms .Here suggestions of improvements need to cover both the more profitable and less profitable firms.
(e) Accountants are required to follow APES110 Code of Ethics for Accountants. Section 100.5 sets out the five fundamental principles to be followed by professional accountants in Australia. List these five fundamental principles and discuss whether any ethical principles have been breached by the salespeople and if any have been breached state which principle has been breached and why.