Tennair Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Evans Equipment and Rogers Refrigeration.?Evans EquipmentRogers RefrigerationSales revenue$215,000$154,000Cost of goods sold95,00068,000General selling costs30,00021,500General administrative costs21,00015,050Cost-driver data used by the firm and traceable to Evans and Rogers are:Customer ActivityCost DriverPool RateSales activitySales visits$900Order takingSales orders250Special handlingUnits handled30Special shippingShipments600???Customer ActivityEvans EquipmentRogers RefrigerationSales activity8 visits5 visitsOrder taking17 orders22 ordersSpecial handling600 units550 unitsSpecial shipping19 shipments30 shipmentsRequired: A. Perform a
customer profitability analysis for Tennair. Compute the gross margin and operating income on transactions related to Evans Equipment and Rogers Refrigeration.B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin.C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.
What will be an ideal response?
A. In dollar terms, Evans' gross margin and operating income are greater than those of Rogers Refrigeration.
| ? | Evans Equipment | Rogers Refrigeration |
| Sales revenue | $215,000 | $154,000 |
| Cost of goods sold | 95,000 | 68,000 |
| Gross margin | $120,000 | $86,000 |
| Selling and administrative costs: | ? | ? |
| General selling costs | $30,000 | $21,500 |
| General administrative costs | 21,000 | 15,050 |
| Customer related costs: | ? | ? |
| Sales visits (8, 5 × $900) | 7,200 | 4,500 |
| Order taking (17, 22 × $250) | 4,250 | 5,500 |
| Special handling (600, 550 × $30) | 18,000 | 16,500 |
| Special (19, 30 × $600) | 11,400 | 18,000 |
| Total | $91,850 | $81,050 |
| Operating income | $28,150 | $4,950 |
B. Gross margin as a % of sales revenue:
Evans: $120,000 ÷ $215,000 = 55.81%
Rogers: $86,000 ÷ $154,000 = 55.84%
General selling and administrative costs as a % of gross margin:
Evans: ($30,000 + $21,000) ÷ $120,000 = 42.5%
Rogers: ($21,500 + $15,050) ÷ $86,000 = 42.5%
Customer-related costs as a % of gross margin:
Evans: ($7,200 + $4,250 + $18,000 + $11,400) ÷ $120,000 = 34.0%
Rogers: ($4,500 + $5,500 + $16,500 + $18,000) ÷ $86,000 = 51.7%
C. Both customers produce approximately the same rate of gross margin on sales and are charged with the same percentage of general selling and administrative costs. The difference lies in the area of customer-related costs. Rogers' costs make the firm a more expensive client to deal with than Evans. Given the dollar volume of sales revenue that is generated, Rogers' special handling and shipping needs (especially the latter) are an expensive proposition for Tennair Corporation.
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