Reference no: EM13602211

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 "large" 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's five biggest customers follows:
A B C D E
Number of units purchased6,0002,5001,3004,2007,800
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 1,300 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's 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?