Are any customers unprofitable? What is causing this? What should Ring Delights do with respect to…


Question Description:

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Customer profitability. Ring Delights is a new company that manufactures custom jewelry. Ring Delights currently has six customers referenced by customer number: 01, 02, 03, 04, 05, and 06. Besides the costs of making the jewelry, the company has the following activities: 1. Customer orders. The salespeople, designers, and jewelry makers spend time with the customer. The cost driver rate is $40 per hour spent with a customer. 2. Customer fittings. Before the jewelry piece is completed the customer may come in to make sure it looks right and fits properly. Cost driver rate is $25 per hour. 3. Rush orders. Some customers want their jewelry quickly. The cost driver rate is $100 per rush order. 4. Number of customer return visits. Customers may return jewelry up to 30 days after the pickup of the jewelry to have something refitted or repaired at no charge. The cost driver rate is $30 per return visit. Information about the six customers follows. Some customers purchased multiple items. The cost of the jewelry is 70% of the selling price. Customer number 01 02 03 04 05 06 Sales revenue $600 $4,200 $300 $2,500 $4,900 $700 Cost of item(s) $420 $2,940 $210 $1,750 $3,430 $490 Hours spent on customer order 2 7 1 5 20 3 Hours on fittings 1 2 0 0 4 1 Number of rush orders 0 0 1 1 3 0 Number of returns visits 0 1 0 1 5 1 1. Calculate the customer-level operating income for each customer. Rank the customers in order of most to least profitable and prepare a customer-profitability analysis. 2. Are any customers unprofitable? What is causing this? What should Ring Delights do with respect to these customers?

Answer

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