A global conglomerate requires a better and an enhanced cost design to establish the profitability of individual client orders. Its plan is to have substantial sales and viabilitydevelopment without includingextraexecutive and managerial individuals. The novel cost designreviews a charge to everyclient order it gets and an extra surcharge if the gooddemanded is not generally available in the inventory. The aim is to channel sales assets to the most effective and lucrative clients: those who purchase standard goods in hugeestimated quantities with trifling demands on technical assets.
Costing of Customers A & B
1. What was the Kanthal president, Ridderstrale, attempting to accomplish with the Account Management System? Are these sensible goals?
2. Why did Ridderstrale feel that the previous cost system was inadequate for the new strategy? Why could there be hidden profit and hidden loss customers with the previous cost system? What causes a customer to be a “hidden loss” customer?
3. How does the new Kanthal 90 Account Management System work? What new features does it offer? What are its limitations that may limit its effectiveness?
4. Consider a product line whose products generate a 50% gross margin (after subtracting volume-related manufacturing and administrative expenses from prices). The cost for handling an individual customer order is SEK 750, and the extra cost to handle a production order for a non-stocked item is SEK 2,250.
a) Compare the net operating profits of two orders, both for SEK 2,000. One order is for a stocked item and the other is for a non-stocked item.
b) Compare the operating profits and profit margins of two customers, A and B. Both customers purchased SEK 160,000 worth of goods during the year. A’s sales came from three orders, for three different non-stocked items. B’s sales came from 28 orders, of which 6 were for stocked items and 22 for non-stocked items.
5. What should Ridderstrale do about the two large unprofitable customers revealed by the account management system?