Question 1

In most companies, all customers are equally profitable

Accepted Answer

Most companies find that profitability varies significantly among customers, often following the Pareto principle where a small percentage of customers account for a large portion of profits.

Question 2

The concept of activity-based costing is used to determine how serving particular customers causes activities to be performed and costs to be incurred under customer profitability analysis.

Accepted Answer

Activity-based costing (ABC) is used in customer profitability analysis to trace the costs of activities and resources to products, services, and customers, thereby determining the profitability of specific customers based on the activities performed for them.

Question 3

Outsourcing is not useful in meeting customer needs because fixed costs remain constant.

Accepted Answer

Outsourcing can help meet customer needs by allowing companies to focus on their core competencies and reduce costs, including variable costs, though fixed costs might not directly be affected by outsourcing decisions.

Question 4

Customer profitability analysis helps management see the overall financial picture for each customer and how management can use this information to help establish a strategic plan for the coming periods.

Accepted Answer

Customer profitability analysis allows management to understand the profitability of individual customers or customer segments, guiding strategic decisions such as resource allocation, pricing, and customer relationship management to enhance overall profitability.

Question 5

Quantitative factors in customer profitability analysis include the status of being a supplier to a prestigious company and the potential to meet new contacts.

Accepted Answer

Quantitative factors in customer profitability analysis are numerical and measurable, such as sales volume, payment history, and order frequency. The status of being a supplier to a prestigious company and the potential to meet new contacts are qualitative factors, not quantitative.

Question 6

When management is determining where to devote the company's resources in serving customers, it needs to remember that, typically, the lion's share of profits comes from the majority of their customers.

Accepted Answer

Typically, the lion's share of profits comes from a minority of the customers, often referred to as the 80/20 rule or Pareto Principle, where around 20% of customers can generate around 80% of profits.

Question 7

The decision to keep certain customers holding on the phone may be the result of customer profitability analysis.

Accepted Answer

Companies often use customer profitability analysis to prioritize service levels, which can lead to decisions about keeping less profitable customers on hold longer while prioritizing more profitable ones.

Question 8

It is generally best to tie employee incentives as closely as possible to organizational goals.

Accepted Answer

Aligning employee incentives with organizational goals ensures that employees are motivated to work towards the company's success, leading to improved performance and achievement of strategic objectives.

Question 9

Typical measures of product delivery performance include the percentage of on-time deliveries, the percentage of orders filled and the delivery cycle time.

Accepted Answer

These metrics are commonly used to assess the efficiency and reliability of a company's delivery process, reflecting how well it meets delivery commitments and customer expectations.

Question 10

Quality-related measures such as the number of customer complaints, the number of warranty claims, and the number of product units returned, are important in assessing the company's effectiveness in serving its customers.

Accepted Answer

These measures directly reflect customer satisfaction and product quality, indicating how well a company meets customer needs and expectations.

Question 11

Customer-related costs include selling costs, marketing costs, ordering costs and distribution costs.

Accepted Answer

Customer-related costs encompass various expenses directly associated with servicing customers, including selling and marketing to attract and retain customers, ordering costs related to processing customer orders, and distribution costs for delivering products or services to customers.

Question 12

Generally, budget levels that seem to motivate best are moderately tight but are perceived by employees as reasonable and attainable.

Accepted Answer

Moderately tight budgets are challenging yet achievable, which can motivate employees by providing clear goals without causing undue stress or feeling unattainable.

Question 13

The allocation method used in determining customer profitability has no effect on customer profitability analysis.

Accepted Answer

The allocation method significantly affects the analysis of customer profitability by influencing how costs are attributed to different customers, which can change the perceived profitability of each customer.

Question 14

Customer profitability analysis is not useful in the service industry.

Accepted Answer

Customer profitability analysis is useful in the service industry as it helps businesses understand which customers or segments are most profitable, allowing for better resource allocation, pricing strategies, and service offerings tailored to high-value customers.

Question 15

Return on Sales is operating income divided by total assets.

Accepted Answer

Return on Sales is calculated by dividing operating profit (or income) by net sales (revenue), not total assets.

Question 16

It is possible for a company to have profitable products and, at the same time, incur customer-related costs that make certain customer relationships unprofitable.

Accepted Answer

While a company may have profitable products, the costs associated with acquiring, servicing, and retaining certain customers (such as marketing, support, and distribution costs) can exceed the revenue generated from those customers, making those specific customer relationships unprofitable.

Question 17

When ABC analysis relies on a cost hierarchy of unit-level, batch-level, product-line level, and facility-level costs, the cost management team is focusing on the customer-related costs.

Accepted Answer

ABC analysis, which relies on a cost hierarchy of unit-level, batch-level, product-line level, and facility-level costs, is focusing on the allocation of costs to products or services, not directly on customer-related costs.

Question 18

In computing overall company profitability, the method of cost allocation to products is not important.

Accepted Answer

The answer of In computing overall company profitability, the method...

Question 19

Customer profitability analysis is useful in identifying the effectiveness of a new raw material mix.

Accepted Answer

Customer profitability analysis is primarily used to analyze the profitability of individual customers or customer segments, not to assess the effectiveness of raw material mixes.

Question 20

Many of a company's costs are incurred before the actual production phase or committed early in a product's life.

Accepted Answer

Many costs are associated with the research, development, and design of a product, which occur before the actual production phase. Additionally, costs related to acquiring materials and securing production facilities are often committed early in a product's lifecycle.

Quiz 6: Managing Customer Profitability