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A company allows its sales representatives discretion to offer price discounts below its $4 list price per unit sold. Details relating to three key customers for the month are listed​ below:Customers A B CUnits sold 10,000 15,000 1,500Discount given per unit $0.30 $0.10 $0.40Number of purchase orders 25 30 27Number of deliveries 52 20 26Number of sales visits 2 1 1Miles travelled per delivery 12 35 30Number of 'fast' orders 1 4 1 Additional​ information: A​ 'fast' order is an emergency​ order, outside of normal delivery​ schedules, and incurs a total cost of  ​$150.  Other​ cost-driver rates are detailed as​ follows:Activity Area Cost-Driver RateOrder-taking $80 per orderDelivery vehicle costs $1 per mile travelledSales visits $90 per visitProduct packaging $0.05 per unit sold Assuming the cost of goods sold is ​$3 per​ unit, calculate the operating profit generated by customer C.

Question

A company allows its sales representatives discretion to offer price discounts below its 4listpriceperunitsold.Detailsrelatingtothreekeycustomersforthemontharelisted​ below:CustomersABCUnitssold10,00015,0001,500Discountgivenperunit4 list price per unit sold. Details relating to three key customers for the month are listed​ below:Customers A B CUnits sold 10,000 15,000 1,500Discount given per unit 0.30 0.100.10 0.40Number of purchase orders 25 30 27Number of deliveries 52 20 26Number of sales visits 2 1 1Miles travelled per delivery 12 35 30Number of 'fast' orders 1 4 1 Additional​ information: A​ 'fast' order is an emergency​ order, outside of normal delivery​ schedules, and incurs a total cost of  ​150. Other​ cost−driverratesaredetailedas​ follows:ActivityAreaCost−DriverRateOrder−taking150.  Other​ cost-driver rates are detailed as​ follows:Activity Area Cost-Driver RateOrder-taking 80 per orderDelivery vehicle costs 1permiletravelledSalesvisits1 per mile travelledSales visits 90 per visitProduct packaging 0.05perunitsold Assumingthecostofgoodssoldis​0.05 per unit sold Assuming the cost of goods sold is ​3 per​ unit, calculate the operating profit generated by customer C.

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Solution

To calculate the operating profit generated by customer C, we need to consider both the revenues and the costs associated with this customer.

  1. Calculate the revenue: The revenue is the price per unit sold times the number of units sold. However, since there is a discount given per unit, we need to subtract this from the list price before multiplying by the number of units sold. Revenue = (List price - Discount) * Units sold Revenue = (4−4 - 0.40) * 1,500 Revenue = 3.60∗1,500Revenue=3.60 * 1,500 Revenue = 5,400

  2. Calculate the cost of goods sold (COGS): COGS = Cost per unit * Units sold COGS = 3∗1,500COGS=3 * 1,500 COGS = 4,500

  3. Calculate the other costs:

    • Order-taking costs = Number of orders * Cost per order Order-taking costs = 27 * 80=80 = 2,160
    • Delivery vehicle costs = Miles travelled per delivery * Number of deliveries * Cost per mile Delivery vehicle costs = 30 * 26 * 1=1 = 780
    • Sales visits costs = Number of sales visits * Cost per visit Sales visits costs = 1 * 90=90 = 90
    • Product packaging costs = Units sold * Cost per unit Product packaging costs = 1,500 * 0.05=0.05 = 75
    • 'Fast' order costs = Number of 'fast' orders * Cost per 'fast' order 'Fast' order costs = 1 * 150=150 = 150

    Total other costs = Order-taking costs + Delivery vehicle costs + Sales visits costs + Product packaging costs + 'Fast' order costs Total other costs = 2,160+2,160 + 780 + 90+90 + 75 + 150=150 = 3,255

  4. Calculate the total cost: Total cost = COGS + Total other costs Total cost = 4,500+4,500 + 3,255 = $7,755

  5. Finally, calculate the operating profit: Operating profit = Revenue - Total cost Operating profit = 5,400−5,400 - 7,755 = -$2,355

So, the operating profit generated by customer C is -$2,355. This means the company is operating at a loss with respect to customer C.

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