Practice Calculations Chapter 11 Problem Essay

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Problem 12-34-1. Gross margin is calculated as gross profit / revenue.

Product a

Product B

Product C

Product D

Gross Margin

12,000 / 32,000 = 37.5%

17,600 / 88,000 = 20%

56,000 / 280,000 = 20%

63,000 / 144,000 = 43.75%

The product that is the most profitable is Product D.

2. The best way to start this question is to figure out the price and COGS per unit for each product. For Product a, the price was $32,000 / 2900 = $11.03 and the COGS per unit is $6.89. For Product B, the price per unit is $20.46 and the COGS per unit is $16.37. For Product C. The price per unit is $51.37 and the COGS per unit is $41.10. For Product D. The price per unit is $90 and the COGS per unit is $50.63.

The next step is to produce an income statement for each customer type.

Problem 12-34

Product a

B

C

D

Price

$11.03

$20.47

$51.38

$90.00

COGS

$6.90

$16.37

$41.10

$50.63

Customer a

Customer B

Customer C

Revenue

$42,822

$141,384

$359,793

COGS

$25,322

$91,759

$278,319

Gross Profit

$17,501 $49,625

$81,474

Gross Margin

40.87%

35.10%

22.
64%

The most profitable customer is Customer a.

The cost to serve % of sales is based on the $140,000 cost to serve expense, which is allocated on the basis of sales. This is calculated as follows:

Customer a

Customer B

Customer C

% of sales

7.87%

25.99%

66.14%

Cost to Serve

$11,020

$36,386

$92,594

These are the cost to serve percentage of sales. The most expensive customer to serve is customer C. This is also the customer with the lowest margins, but the highest dollar value of sales. However, all have the same cost-to-serve as a percentage of sales, because cost-to-serve is allocated as a percentage of sales. The figure is 25.74%.

I'm afraid I do not really understand that chart, and can't make Excel draw it. The answer to the question is actually simple, however. The best way to increase the profit for every customer is to increase the percentage of Product D. that is sold. This is the highest margin product, so the more of that product that is sold the better the margin for each customer will be. For Customer C,.....

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