Question

Adelaide Limited is a wholesale business. It supplies products to four department stores operating in the Riverland towns of South Australia. The names of the stores are: Loxton, Renmark, Waikerie and Berri. These four businesses are the customers of Adelaide Limited. Adelaide Limited send catalogues to its customers (retail stores) on a monthly basis. The stores are entitled to return unsold products within a six-month period from the purchase date. The following data were collected from last year’s (2019) operations:

	customers
	loxton	renmark	waikerie	berri
net sales (sales minus sales return)	$65,000	$30,000	$120,000	$80,000

The direct costs (cost of goods sold) averages 70% of net sales. Adelaide Limited incurred indirect costs of $39,225 in 2019. Alex Stuart, Chief Executive Officer of Adelaide Limited, is having a discussion with Emily Jones, Finance Director. Following is the conversation: Alex: Overall, our business is profitable. I wish to know more about our customer profitability. Emily: We usually calculate the organisational profit. Certainly we can find out customer profitability.

Requirement: 1.Calculate profitability of each of the customers for Adelaide Limited. Allocate indirect costs based on the net sales ($) to the four retail stores (customers).

2.Explain the benefits of knowing the customer profitability for Adelaide Limited?

Answer 1

1.

Customer Profitability Report
	Customers
	Loxton	Renmark	Waikerie	Berri
Net sales	65000	30000	120000	80000
Less: Cost of goods sold	45500	21000	84000	56000
Gross margin	19500	9000	36000	24000
Allocated Indirect costs	8643	3989	15956	10637
Customer profitability $	10857	5011	20044	13363

2. Knowing the customer profitability is beneficial to a business as it helps it to identify customers which are more profitable to do business with and the other not so profitable or loss making customers which the business may be better off without. Terms of business may also be laid down for differenct customers depending upon their profitabiliy to the business. Long-term business strategy can thus be developed.