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Category > Accounting Posted 06 Aug 2017 My Price 11.00

Okus Designs

Ray Panneton, president of Okus Designs, met with his CFO and vice president of marketing to discuss the profitability of the company's top 10 customers. These customers account for 80% of the company's revenues. The following table was prepared by the accounting department to assist Ray in his decision making.

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Customer Revenues Cost of Sales Selling Costs Customer Net Profit Customer Profit Margin
Meredith's Boutique $ 5,000,000 $ 3,750,000 $ 750,000 500,000 10.00%
Stewart Industries 4,890,000 3,618,600 978,000 293,400 6.00%
T&P Incorporated 4,500,000 3,375,000 1,129,500 (4,500) (0.10%)
Talley Design Studios 4,200,000 3,192,000 378,000 630,000 15.00%
UPPtown Productions 4,100,000 2,870,000 902,000 328,000 8.00%
O'Brien's Tavern 3,900,000 2,730,000 1,365,000 (195,000) (5.00%)
House of Claire 3,850,000 2,887,500 885,500 77,000 2.00%
Copper Metalworks 3,700,000 2,664,000 888,000 148,000 4.00%
J Floral Designs 3,625,000 2,501,250 1,486,250 (362,500) (10.00%)
Old Main Masonry 3,500,000 2,485,000 770,000 245,000 7.00%
Total/Average $41,265,000 $30,073,350 $9,532,250 1,659,400 4.02%

Required

(a) Ray is concerned about the customers with negative customer profit margins. If these customers are dropped, what will be the new total customer net profit and customer profit margin (assume the cost of sales and selling costs can be eliminated)?
(b) Ray is also concerned about customers with customer profit margins below the current company average. If all customers with below-average profit margins are dropped, what will be the new total customer net profit and customer profit margin (assume the cost of sales and selling costs can be eliminated)?
(c) Compare your answers to parts (a) and (b). What do you notice?
(d) If Ray were to drop all customers with profit margins below average, how much in new customer revenues would need to be added to make the company as well off as it would be if it only dropped the customers with negative profit margins? Use an average profit margin for the new customers equal to the one you calculated in part (a).
(e) What action do you recommend Ray take?

Answers

Maurice Tutor
(5)
Status NEW Posted 06 Aug 2017 10:08 AM My Price 11.00

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