Power Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company's three largest customers: Weekend Project, Tool Mart, and Fix-It City. Power's management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitabilityRequired: A. For each of the three chains, compute: 1. Total customer-related costs as a percentage of gross margin.2. The average order size (ignoring sales returns).3. The ratio of regular orders to rush orders.4. The number of sales returns as a percentage of the number of total orders.B. Prepare a brief summary of your findings.
Should Power work with any of the chains in an effort to improve results? Explain.?Weekend ProjectTool MartFix-It CityGross sales volume:??? Dollars$2,000,000$4,900,000$4,600,000 Number of Orders50175125Type of order:??? Regular40135110 Rush104015Sales returns:??? Dollars$100,000$400,000$240,000 Number of returns3208Total customer-related costs$245,100$918,000$457,800
What will be an ideal response?
A.
1. Customer-related costs as a percentage of gross margin:
Weekend Project: $245,100 ÷ [($2,000,000 - $100,000) × 30%] = 43%
Tool Mart: $918,000 ÷ [($4,900,000 - $400,000) × 30%] = 68%
Fix-It City: $457,800 ÷ [($4,600,000 - $240,000) × 30%] = 35%
2. Average order size:
Weekend Project: $2,000,000 ÷ 50 orders = $40,000
Tool Mart: $4,900,000 ÷ 175 orders = $28,000
Fix-It City: $4,600,000 ÷ 125 orders = $36,800
3. Ratio of regular orders to rush orders:
Weekend Project: 40:10 = 4:1
Tool Mart: 135:40 = 3.375:1
Fix-It City: 110:15 = 7.33:1
4. Number of sales returns as a percentage of total orders:
Weekend Project: 3 ÷ 50 = 6%
Tool Mart: 20 ÷ 175 = 11.4%
Fix-It City: 8 ÷ 125 = 6.4%
B. Customer-related costs are driven by events (and costs) directly traceable to clients. In this case, Tool Mart's costs as a percentage of gross margin are much higher (68%) than those of Weekend Project and Fix-It City. This result is not surprising given that the firm creates a large number of small orders ($28,000 vs. $36,800 and $40,000) for Power to process. In addition, relative to the other two firms, Tool Mart depends more heavily on rush orders, which likely creates additional cost. Finally, a number of Tool Mart's orders (11.4%) eventually result in sales returns, again creating additional processing expense for Power. In summary, Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City, and management should approach Tool Mart to see if the company can change its ways of doing business.
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