Question: Customer profitability in a manufacturing firm. Mississippi Manufacturing makes a component called B2040. This component is manufactured only when ordered by a customer, so Mississippi keeps no inventory of B2040. The list price is $112 per unit, but customers who place "large" orders receive a 10% discount on price. The customers are manufacturing firms. 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. If the component needs to be exchanged or repaired, customers can come back within 14 days for free exchange or repair. The full cost of manufacturing a unit of B2040 is $95. In addition, Mississippi incurs customer-level costs. Customer-level cost-driver rates are:
Order taking $360 per order
Product handling $15 per case
Rush-order processing $560 per rush order
Exchange and repair costs $50 per unit
Information about Mississippi's five biggest customers follows:
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.
1. Calculate the customer-level operating income for these five customers.
2. Prepare a customer-profitability analysis by ranking the customers from most to least profitable.
3. Discuss the results of your customer-profitability analysis. Does Mississippi have unprofitable customers? Is there anything Mississippi should do differently with its five customers?