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(Answered) Profitability Analysis 1. With more accurate product costs generated by an effective ABC system, managers can conduct in-depth analyses of...


Profitability Analysis 1. With more accurate product costs generated by an effective ABC system, managers can conduct in-depth analyses of...


Module 11 Assignment: Customer Profitability Read Special Topic – Customer Profitability Analysis (the attachment) to get the basic understanding about the topic. And read the article assigned below (A7):http://www.journalofaccountancy.com/issues/2008/dec/managingcustomerprofitability.html“Managing Customer Profitability,” written by M. Epstein, M. Friedl, and K. Yuthas, Journal of Accountancy (December 1, 2008).Conclusion section of the article makes the following two statements: 1.    By measuring the profitability of segments and managing customer relationships based on customer value, both the customer and company win.2.    Over time a company will gain invaluable knowledge and be able to put it to work for the mutual benefit of all stakeholdersEvaluate each statement in detail using the examples in the article, and submit one-page summary report in a MS Word file, single spaced with a font size of 12, to Module 11 Assignment in Dropbox by the deadline. http://www.journalofaccountancy.com/issues/2008/dec/managingcustomerprofitability.htmlProfitability Analysis

 

1. Product Profitability Analysis

 

Original Activity-based Costing (ABC) systems focus on manufacturing costs and their

 

assignment to products. With more accurate product costs generated by an effective ABC

 

system, managers can conduct in-depth analyses of profitability of their products. They

 

can correctly assess the profitability of individual products or product lines to identify

 

profitable products and unprofitable products. .

 

For companies producing numerous products or models, profitability analysis will

 

become critical because the overall profitability of the company can disguise the poor

 

performance of individual products. It is important to see that all products are profitable

 

in the long run.

 

ABC database with the information about activities, costs, and cost drivers can provide

 

numerous insights into ways that managers could transform unprofitable products into

 

profitable ones. Pricing strategy can be re-evaluated for each product. It may be possible

 

to identify activities that can be eliminated or performed more efficiently. The decision to

 

drop some of the unprofitable products may be made to improve overall profitability of

 

the company.

 

2. Customer Profitability Analysis

 

Studies have shown that only 20 percent of a company’s customers contribute to profits and

 

the remaining 80 percent generate losses. Moreover, with increasing importance of customer

 

satisfaction and market-oriented strategy, the costs of marketing and distribution have been

 

increasing rapidly in recent years. These costs are not directly related to the products, but

 

rather associated with individual customers or market segments.

 

Customer profitability analysis is an approach to cost management that identifies the costs and

 

benefits of serving specific customers or customer types to improve an organization’s overall

 

profitability. Just as ABC can reveal product profitability, customer profitability analysis

 

based on the ABC information can identify profitable and unprofitable customers. This piece

 

of information allows organizations to take appropriate actions to increase their profitability.

 

Like the case of the products, the overall profitability of a company can disguise the poor

 

performance of individual customers. Allocation of customer-related costs to individual

 

customers based on appropriate cost drivers will allow managers to assess the

 

profitability of individual customers or customer groups more correctly.

 

An analysis of customer differences on both revenues and costs can provide important

 

insight into why differences in customer profitability exist. ABC can also help the

 

company analyze customer-related activities

 

so that customer profiles can be developed.

 


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