Customer Profitability; Facilities Layout
Exercise 1 - Salespersons' incentives, customer profitability
Explain your rationale and show all of your work
In response to how the sales incentives might be contributing to falling profits despite growing sales, Chan Company's controller has produced the following information on last year's sales to two customers that purchased a variety of products from the company:
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Customers
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Carlson
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Donner
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Sales
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$450,0001
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$400,000
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Cost of goods sold
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180,000
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80,000
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MSDA expenses, excluding sales commissions
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320,000
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65,000
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a. Which customer is more profitable for the company?
b. Compare a sales incentive scheme that pays 2% of sales revenue to an incentive scheme that pays 4% of customer profit. How will each scheme affect salespersons' desire to increase sales to each customer?
Exercise 2 - Customer profitability
A credit card company has classified its customers into the following types for customer profitability analysis:
1. Applies for credit card in response to a low introductory interest rate; transfers balance to new account, but when the low introductory rate expires, the customer transfers the balance to an account with a different credit card company that has offered a low introductory rate.
2. Charges a large dollar volume of purchases; pays balance in full and on time each month.
3. Carries a high balance; pays only the minimum required payment but pays regularly with occasional late payment.
4. Carries a high balance; pays at least the minimum required payment but does not pay in full and always pays on time.
5. Carries a low balance; pays at least the minimum required payment but does not pay in full and always pays on time.
6. Does not use the account but does not close the account.
The following facts pertain to the credit card company's operations:
- Merchants pay the credit card company a percentage of the dollar sales on each credit card transaction.
- Customers pay no interest on charges for purchases if the balance is paid in full and on time each month.
- The credit card company charges a late fee if the customer's payment is late.
- The credit card company incurs costs to send statements to inactive customers.
Given the preceding information, which customer types would you expect to be the most desirable or profitable, the next most profitable, and so on for the credit card company on a long-term basis? Explain your ranking.
Exercise 3 - ABC and TOC
Answer should be no more than 100 words and adhere to the West Writing Style Handbook.
Discuss the similarities and differences between activity-based costing and the theory of constraints, as well as situations in which one approach might be preferable to the other.
Exercise 4 - Relevant cost and revenues: changes in facilities layout
Answer should be no more than 100 words and adhere to the West Writing Style Handbook.
To facilitate a move toward JIT production, AB Company is considering a change in its plant layout. The plant controller, Anita Bentley, has been asked to evaluate the costs and benefits of the change in plant layout. After meeting with production and marketing managers, Anita has compiled the following estimates:
- Machine moving and reinstallation will cost $100,000.
- Total sales will increase by 20% to $1,200,000 because of a decrease in production cycle time required under the new plant layout. Average contribution margin is 31% of sales.
- Inventory-related costs will decrease by 25%. Currently, the annual average carrying value of inventory is $200,000. The annual inventory financing cost is 15%.
Should AB implement the proposed change in plant layout? Support your answer.