.14-31
Customer profitability in a manufacturing firm. Bizzan Manufacturing makes a component called P14-31. This component is manufactured only when ordered by a
customer so Bizzan keeps no inventory of P14-31. The list price is $100 per unit but customers who place %u201Clarge%u201D orders receive a 10% discount on
price. Currently the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished it is packed in cases of
10. When a customer order is not a multiple of 10 Bizzan uses a full case to pack the partial amount left over (e.g. if customer C orders 25 units three
cases will be required). Customers pick up the order so Bizzan incurs costs of holding the product in the warehouse until customer pick up. The customers are
manufacturing firms; if the component needs to be exchanged or repaired customers can come back within 10 days for free exchange or repair.
The full cost of manufacturing a unit of P14-31 is $80. In addition Bizzan incurs customer-level costs. Customer-level cost-driver rates are as follows:
Order taking
$390 per order
Product handling
$10 per case
Warehousing (holding finished product)
$55 per day
Rush order processing
$540 per rush order
Exchange and repair costs
$45 per unit
Information about Bizzan%u2019s five biggest customers follows:
A B C D E
Number of units purchased60002500130042007800
Discounts given10%010%010% on half the units
Number of orders1012521812
Number of cases600250120420780
Days in warehouse (total for all orders)1418012140
Number of rush orders03006
Number of units exchanged/repaired02542580
The salesperson gave customer C a price discount because although customer C ordered only 1300 units in total 52 orders (one per week) were placed. The
salesperson wanted to reward customer C for repeat business. All customers except E ordered units in the same order size. Customer E%u2019s order quantity
varied so E got a discount part of the time but not all the time.
Required
1. Calculate the customer-level operating income for these five customers. Use the format in Exhibit 14-5. Prepare a customer-profitability analysis by ranking
the customers from most to least profitable as in Exhibit 14-7
2. Discuss the results of your customer-profitability analysis. Does Bizzan have unprofitable customers? Is there anything Bizzan should do differently with
its five customers?
14-32
Variance analysis sales-mix and sales-quantity variances. Chicago Infonautics Inc. produces handheld Windows CE%u2122-compatible organizers. Chicago
Infonautics markets three different handheld models: PalmPro is a souped-up version for the executive on the go PalmCE is a consumer-oriented version and
PalmKid is a stripped-down version for the young adult market. You are Chicago Infonautics%u2019 senior vice president of marketing. The CEO has discovered
that the total contribution margin came in lower than budgeted and it is your responsibility to explain to him why actual results are different from the
budget. Budgeted and actual operating data for the company%u2019s third quarter of 2012 are as follows:
Budgeted Operating Data Third Quarter 2012
Selling Price Variable Cost per Unit Contribution Margin per Unit Sales Volume in Units
PalmPro $374 $185 $189 13580
PalmCE 272 96 176 35890
PalmKid 144 66 78 47530
97000
Actual Operating Data Third Quarter 2012
Selling Price Variable Cost per Unit Contribution Margin per Unit Sales Volume in Units
PalmPro $365 $175 $190 10120
PalmCE 288 94 194 32200
PalmKid 110 75 35 49680
92000
Required
1. Compute the actual and budgeted contribution margins in dollars for each product and in total for the third quarter of 2012.
2. Calculate the actual and budgeted sales mixes for the three products for the third quarter of 2012.
3. Calculate total sales-volume sales-mix and sales-quantity variances for the third quarter of 2012. (Calculate all variances in terms of contribution
margins.)
4. Given that your CEO is known to have temper tantrums you want to be well prepared for this meeting. In order to prepare write a paragraph or two comparing
actual results to budgeted amounts.