Deck 6: Measuring and Managing Customer Relationships

Question 1

Many companies trace marketing,sales,distribution,and administration costs to customers to accurately measure customer profitability.

Answer 1

False

Question 2

Low cost to serve customers:

A)have low order quantities.
B)have large amounts of post sales support.
C)order standard products.
D)have customized delivery.

Answer 2

order standard products.

Question 3

Measuring customer profitability can be accomplished through an activity based costing study.

Answer 3

True

Question 4

Many companies quantify their customer relationships by using nonfinancial metrics on satisfaction and loyalty.

Question 5

Customer financial performance:

A)are best measured with financial metrics.
B)are reflected on the balanced scorecard as part of the learning and growth perspective.
C)can be improved by offering special features, and highly responsive customer service.
D)is improved by focusing on a combination of financial and nonfinancial metrics.

Question 6

High cost to serve customers:

A)have high order quantities.
B)have large amounts of post sales support.
C)order standard products.
D)have little to no pre-sales support.

Question 7

The pricing waterfall charts revenue leaks from list price caused by discounts and allowances used to gain customer loyalty.

Question 8

MSDA expenses as a percentage of sales is an effective way to measure customer profitability.

Question 9

Marketing,selling,distribution,and administrative expenses:

A)can be traced through causal relationships to products.
B)are independent of volume and product mix.
C)are usually incurred through a single distribution channel.
D)do not work well with activity based costing.

Question 10

Companies should avoid high cost-to-serve customers because they are unprofitable.

Question 11

Brent Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue.The new CFO has discovered that Brent's customers differ greatly in their ordering patterns and interaction with Brent's sales force.Because the CFO believes Brent's cost system does not accurately assign MSDA expenses to customers,he developed an ABC system and gathered the following information.

Required:
(a)Using the current cost system's approach of assigning MSDA expenses to customers using a rate of 33% of sales revenue,determine the operating profit associated with Austin and with Brooke.
(b)Using the activity-based costing information provided,determine the operating profit associated with Austin and with Brooke.
(c)Which of the two methods produces more accurate assignments of MSDA expenses to customers? Explain.

Question 12

Discuss the issues related to excessive focus on nonfinancial customer metrics such as customer loyalty and satisfaction.

Question 13

The 80/20 rules states that the top 20% of customers generate 80% of revenues.

Question 14

The 40-1 rule demonstrates that the top customers generate revenues at a rate of 40-1 over all other customers.

Question 15

Low cost-to-serve customers order in smaller quantities.

Question 16

Customized delivery is a characteristic of a high cost-to-serve customer.

Question 17

Customer profitability:

A)is reflected by gross margin.
B)are most accurately measured using traditional costing.
C)are most accurately measured using activity based costing.
D)are most accurately measured using a combination of traditional costing and activity based costing.

Question 18

Marketing,selling,distribution,and administrative expenses are dependent on the volume and mix of products that the company produces.

Question 19

Many costs of marketing,selling,and distribution expenses are incurred not to support individual products or product lines,but rather to support customers,market segments or distribution channels.

Question 20

One option to transform breakeven or loss customers into profitable customers is to use more discipline in granting discounts and allowances.

Question 21

Establishing a base price for producing and delivering a standard quantity of each standard product is an example of:

A)process improvements.
B)activity based pricing.
C)managing relationships.
D)the pricing waterfall.

Question 22

Staley company has 30 order operators with associated costs of $1,000,000 per year.Staley calculated that each operator worked about 2,000 hours per year.Allowing for time off,each operator provided about 1,600 or productive work per year.What is the rate per hour for each order entry employee?

A)$20.83
B)$28.83
C)$500.00
D)$625.00

Question 23

How do customer costs differ in service companies when compared to manufacturing companies? Discuss customer independent and customer specific costs.

Question 24

The whale curve shows:

A)the most profitable 20% of customers generate about 180% of sales.
B)the most profitable 20% of customers generate about 80% of total sales.
C)the most profitable 20% of customers generate about 80% of total profits.
D)the most profitable 20% of customers generate about 180% of total profits.

Question 25

Compare the 80-20 rule and the whale curve as it relates to customer profitability.

Question 26

Which of the following is NOT an option to transform breakeven or loss customers into profitable ones?

A)Improve the process used to produce, sell, deliver and service the customer.
B)Use less menu-based pricing that allows customers to select features and services it wishes to pay for.
C)Improve margins by lowering costs.
D)Use more discipline in granting discounts and allowances.

Question 27

The whale curve shows that the middle 60% of customers generate the majority of total profits.

Question 28

Describe the characteristics of high cost-to-serve customers and low cost-to-serve customers.

Question 29

The rate per hour of each order entry employee is $56.00 per hour.On average,it takes an order entry employee about 0.1 hour to enter the basic customer information for a manual customer order.In addition,manual orders require an operator to spend an additional 0.02 hour to enter each line item on the order.What is the order entry cost associated with a manual order with 10 line items?

A)$0.30
B)$5.60
C)$11.20
D)$16.80

Question 30

Persuading customers to use a greater score of the company's products and services is an example of:

A)process improvements.
B)activity based pricing.
C)managing relationships.
D)the pricing waterfall.

Question 31

Examining internal operations to see where the company can improve processes to lower costs of serving customers is an example of:

A)process improvements.
B)activity based pricing.
C)managing relationships.
D)the pricing waterfall.

Question 32

Baker company has 40 order operators with associated costs of $2,000,000 per year.Baker calculated that each operator worked about 2,000 hours per year.Allowing for time off,each operator provided about 1,600 or productive work per year.On average,it takes an order entry employee about 0.2 hour to enter the basic customer information for a manual customer order.In addition,manual orders require an operator to spend an additional 0.04 hour to enter each line item on the order.
a.What is the rate per hour for each order entry employee?
b.What is the order entry cost associated with a manual order with 10 line items?

Question 33

For service companies,in contrast,customer behavior determines the quantity of demands for organizational resources that produce and deliver the service to customers.

Question 34

Discuss the 80-20 rule and the 40-1 rule.

Question 35

A bank customer with a high checking account balance and few transactions is a high cost-to-serve customer.

Question 36

In a service company,marketing and selling costs are customer independent.

Question 37

The whale curve:

A)graphs sales verses customers.
B)graphs profits verses customers.
C)graphs the 80/20 rule.
D)finds that 80% of costs are generated by 20% of the customers.

Question 38

Service companies:

A)focus more on customer costs and profitability than manufacturing companies.
B)are less customer driven than manufacturing companies..
C)have less variation in demand for organizational resources.
D)None of the above

Question 39

The 80/20 rule:

A)finds that 80% of revenues are generated by the top 20% of the customers.
B)finds that 80% of profits are generated by the top 20% of the customers.
C)can be graphed as the whale curve.
D)finds that 80% of costs are generated by 20% of the customers.

Question 40

Aggressive customers who demand low prices and customized services:

A)require high costs to serve.
B)are most profitable to serve.
C)are customers to eliminate.
D)require high costs and are most profitable to serve.

Question 41

Activity based costing can be used to trace revenue deductions such as discounts to individual orders and customers.

Question 42

Additional costs to serve and retain the customer in year t is represented in the customer lifetime value equation as ct.

Question 43

Customer lifetime value is the discounted net cash flows from the customer for all of the years that it remains a customer compared to the initial acquisition cost to obtain the lifetime relationship with the customer.

Question 44

Omega Company has the following two customers:
If the company pays a 4% sales commission based on customer profit,this will encourage a salespersons' efforts to sell to:

A)Woodruff, an unprofitable customer.
B)Woodruff, a profitable customer.
C)Ensley, an unprofitable customer.
D)Ensley,a profitable customer.

Question 45

Customers that require a low price and lots of customized service are:

A)high cost to serve and low margin.
B)low cost to serve and low margin.
C)high cost to serve and high margin.
D)low cost to serve and high margin.

Question 46

Discounts given to encourage large purchases are known as sales discounts.

Question 47

Bealing Company has the following operating profit:

a. Bealing could increase revenues by 10% by reducing sales discounts by 10%.There will be no changes in variable or fixed costs.What would be the percentage increase in operating profits?
b. Refer to the original information in this problem.Suppose Bealing's sales people discounted sales another 2% with no change in variable or fixed costs.What is the change in operating profits?

Question 48

Describe the pricing waterfall.

Question 49

Salespersons' incentives that set minimum quotas and commissions based on sales revenue,and tie bonuses and rewards to achieving sales revenues above a stretch target contribute to unprofitable customer relationships.

Question 50

What are the four options that manufacturing and service companies have to transform breakeven or loss customers into profitable ones?

Question 51

Companies can use time-driven ABC costing systems to create customer-specific profit and loss statements.

Question 52

Jackie Company's CFO provided the following information on last year's sales for two customers that purchased a variety of products from the company.

a. Which customer is more profitable for the company?
b. Compare a sales incentive scheme that pays 3% of sales revenue to an incentive scheme that pays 5% of customer profit.How will each scheme affect salespersons' desire to increase sales to each customer?

Question 53

Customers are price sensitive with few special demands are:

A)high cost to serve and low margin.
B)low cost to serve and low margin.
C)high cost to serve and high margin.
D)low cost to serve and high margin.

Question 54

The pricing waterfall:

A)charts the multiple sources of revenue by customer.
B)charts multiple list prices offered to different customers.
C)charts the multiple revenue leaks from list price caused by allowances and discounts.
D)charts multiple types of customer costs.

Question 55

Omega Company has the following two customers:
If the company pays a 2% sales commission based on revenue,this will encourage a salespersons' efforts to sell to:

A)Woodruff, an unprofitable customer.
B)Woodruff, a profitable customer.
C)Ensley, an unprofitable customer.
D)Ensley,a profitable customer.

Question 56

Companies base salespeople's compensation on net income because it is simple to measure.

Question 57

Typical sales person's compensation:

A)is paid in the form of salary.
B)encourages sales only to profitable customers.
C)is usually based on customer profit.
D)is usually based on sales revenue.

Question 58

Compare and contrast a typical salesperson's revenue based compensation plan to a compensation plan based on customer profits.

Question 59

Duration of the relationship is a critical parameter for calculating customer lifetime value.

Question 60

Which of the following is NOT part of the pricing waterfall chart?

A)dealer list price
B)customer discount price
C)invoice price
D)actual net price

Question 61

________ uses measurements of customer attitudes toward the product or service.

A)Profitability
B)Customer satisfaction
C)Customer loyalty
D)The net promoter score

Question 62

Based on the following company data,what is the net promoter score?

A)2.18%
B)38.12%
C)12.82%
D)5.88%

Question 63

Which of the following is not a critical parameter for calculating customer lifetime value?

A)initial acquisition cost
B)revenues
C)profits or losses
D)the duration of the relationship

Question 64

Describe five reasons that loyal customers are valuable.

Question 65

What is the customer lifetime value of customer Emma Stone for the first three years of the customer relationship?

A)$2,080.00
B)$940.49
C)$1,380.00
D)$240.49

Question 66

What is the customer lifetime value of customer W.Harrelson for the first three years of the customer relationship?

A)$825.12
B)$2,925.12
C)$6,390.00
D)$4,190.00

Question 67

Repeated or increased purchases of the product or service is known as?

A)profitability
B)customer satisfaction
C)customer loyalty
D)the net promoter score

Question 68

Compute the customer lifetime value of Customer 222 based on the data below for the first six years of the customer relationship.Costs (ct)were incurred to promote customer retention at a rate of 0.8 in years 1 through 6.

Question 69

Customer loyalty may be low regardless of the customer's attitude toward the product or the company in highly competitive industries,characterized by low differentiation among products,with many substitutes and a low cost of switching.

Question 70

Based on the following company data,what is the net promoter score?

Question 71

Customer loyalty is characterized by a customer's attitude toward a product or company.

Question 72

Companies generally use two approaches to customer satisfaction surveys: telephone interviews and personal interviews.