Xanadu Manufacturing Ltd. (XML) has two main customers in its' Eastern Canada division. The current year is 2016 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration. XML has a required rate of return of 12%.
The customer gross margins projected for the five year period ending 2020 are as follows:

XML has identified the following customer related activities and their rates:

The company has the following information for 2016 regarding the three customers:

The ratio of activity costs to gross margin is expected to be the same for the years after 2016.
Required:
a. Determine the profitability of each customer for 2016 using activity-based costing.
b. Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained. Include a column for the five year total.
c. Use the present value method to discount each customer's contribution to profit. Assume end of period payments.
d. Provide two qualitative measures that can be effective in evaluating customers.

Question

Xanadu Manufacturing Ltd. (XML) has two main customers in its' Eastern Canada division. The current year is 2016 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration. XML has a required rate of return of 12%.
The customer gross margins projected for the five year period ending 2020 are as follows:
  
XML has identified the following customer related activities and their rates:
  
The company has the following information for 2016 regarding the three customers:
  
The ratio of activity costs to gross margin is expected to be the same for the years after 2016.
Required:
a. Determine the profitability of each customer for 2016 using activity-based costing.
b. Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained. Include a column for the five year total.
c. Use the present value method to discount each customer's contribution to profit. Assume end of period payments.
d. Provide two qualitative measures that can be effective in evaluating customers.

Quizplus · Accepted Answer

The Answer of Xanadu Manufacturing Ltd. (XML) has two main customers in its' Eastern Canada division. The current year is 2016 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration. XML has a required rate of return of 12%.
The customer gross margins projected for the five year period ending 2020 are as follows:
  
XML has identified the following customer related activities and their rates:
  
The company has the following information for 2016 regarding the three customers:
  
The ratio of activity costs to gross margin is expected to be the same for the years after 2016.
Required:
a. Determine the profitability of each customer for 2016 using activity-based costing.
b. Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained. Include a column for the five year total.
c. Use the present value method to discount each customer's contribution to profit. Assume end of period payments.
d. Provide two qualitative measures that can be effective in evaluating customers.