Victory Products Ltd manufactures high-technology products for the computer industry. Victory’s accountant has produced a profit report showing the profitability of each of its three main customers for last year.

Victory Products profit report.

Â	Franklin Industries	Engineering Partners	Zeta PLC	Other customers	Total
Sales	1,000,000	1,500,000	2,000,000	1,500,000	6,000,000
Cost of materials	250,000	600,000	750,000	750,000	2,350,000
Cost of labour	300,000	200,000	300,000	75,000	875,000
Gross profit	450,000	700,000	950,000	675,000	2,775,000
Corporate overheads: allocated as 30% of sales	300,000	450,000	600,000	450,000	Â
Rental	Â	Â	Â	Â	250,000
Depreciation	Â	Â	Â	Â	350,000
Non-production salaries	Â	Â	Â	Â	600,000
Selling expenses	Â	Â	Â	Â	350,000
Administration	Â	Â	Â	Â	250,000
Operating profit	150,000	250,000	350,000	225,000	975,000

Victory is operating at almost full capacity, but wishes to improve its profitability further. The accountant has reported that, based on the above figures, Franklin Industries is the least profitable customer and has recommended that prices be increased. If this is not possible, the accountant has suggested that Victory discontinues selling to Franklin and seeks more profitable business from Engineering Partners and Zeta.

Labour is the most significant limitation on capacity. It is highly specialized and is difficult to replace. Consequently, Victory does all it can to keep its workforce even where there are seasonal downturns in business. The company charges £100 per hour for all labour, which is readily transferable between each of the customer products.

You have been asked to comment on the accountant’s recommendations.