Question

Suncrush plc is a distributor of Orange Juice Cartons and management want to ensure that that all its customers are contributing towards the company’s profitability. The company buys in the cartons at £1.00 per carton and sells it for £1.25, although some customers receive a discount.

In order to facilitate an understanding of the firm’s current customers in order to increase overall profit and aid competitiveness, the company decides to analyse the profitability of four of its major customers. The company uses activity based costing to analyse the cost drivers and cost rates for each level of the company’s activities.

Table 1 below identifies the cost drivers and cost driver rates for each level of activity. To simplify this activity the cost-hierarchy for each category has been ignored.

Activity	Cost driver and rate
Cost per carton	£1.00
Order taking	£200 per purchase order
Delivery vehicles	£4 per delivery mile travelled
Customer visits	£80 per customer visit
Product handling	£0.02 per carton sold
Sales returns	£50 per occurrence
Expedited (rushed) deliveries	£500 per expedited delivery

Table 2 shows the customer profitability data for four customers.

	A	B	C	Z
Cartons sold	2,000,000	1,600,000	140,000	120,000
List selling price	£1.25	£1.25	£1.25	£1.25
Actual selling price	£1.17	£1.23	£1.15	£1.25
Number of purchase orders	60	50	50	20
Number of deliveries	120	60	40	30
Number of customer visits	12	10	12	6
Miles travelled per delivery	10	24	40	12
Sales returns	1	0	2	0
Number of expedited (rushed) deliveries	2	0	10	0

Required:

1. Calculate the operating profit of each of the four customers now being examined. Comment on the results.
2. To provide further information for management produces a table expressing each individual customer cost as a percentage of their gross profit. Comment on your results
3. What factors should the business consider in deciding whether to drop one or more of customers A, B, C, or Z?

Answer 1