Answers To Quiz 5

Answers to Quiz 5
1. Two students were debating about whether or not, in the Customer Value
Management Cycle, customer influence and customer knowledge are additive or
multiplicative variables. The combination of the two variables are referred to as
Answer: Customer Impact
Refer to the article on Managing customer profitability.
2. What internal action can be taken by a company, in the following scenario to

improve customer profitability; the south area segment has high revenues with low
profits.
NB. for the purpose of this question the sales team expense is treated as a general
and administration expense and profitability is equal to gross profit margin.
Answer: Reconfigure the sales team compensation package so that the focus is on
profits.
Tip. Alignment of compensation package with profitability is the objectives hence the
compensation package should be so structured to ensure sales personnel are
compensate on increasing profitability.
Refer to the article on Managing customer profitability.
3. Which costing approach is most suitable for customer profitability analysis?

Answer: Activity based costing
Refer to the article on Measuring and managing customer profitability.
4. Customer profitability analysis is an antecedent exercise which allows a company to

answer which of the following questions;
i. Does the customer sales volume justify the rebates, discounts or promotion
structure we provide to that customer or segment?
ii. Should our focus be sales volume or profit margin with a particular customer or
segment?
iii. Should we reassign resources among the customers or segments?
Answer: All of the above
Refer to the article on Measuring and managing customer profitability.
5. Customer life time value is particularly useful to:

i. companies with large variations in purchasing patterns by customers
ii. companies with high customer acquisition costs
iii. companies with high customer retention costs
Refer to chapter in text
6. In developing strategies to eliminate less profitable or non-profitable customers

which of the following can be employed?
i. Increase prices
ii. changing the features of the product or service so that it becomes unsuitable
iii. cease marketing to that segment
Refer to chapter in text
7. From the following information, calculate the market share variance (MSV).
Budgeted market share - 25%
Actual market share - 28%
Market Capitalization - $2,000,000
Actual market size - 900,000 units
Budgeted Selling price per unit - $500
Budgeted Variable cost per unit - $275
Answer
= 900,000 × (28% - 25%) × ($500 - $275) = $6,075,000 F
8. From the following information, calculate the market size variance.
Budgeted market share - 25%
Actual market share - 28%
Actual market size - 900,000 units
Budgeted market size - 780,000 units
Budgeted Selling price per unit - $500
Budgeted Variable cost per unit - $275
Answer
= (900,000 – 780,000) × 25% × ($500 - $275) = $6,750,000
For both questions 7 and 8, remembering that contribution margin is equal to selling
price minus variable cost would have surely helped.
9. Hayeraft Inc. has three customer segments; (a) small, (b) medium and (large). The
following information is provided:
(a) small segment - Revenue at list price $10M, Discounts from list price $0.5M,
Cost of goods sold $6.8M, Delivery and Ordering costs $0.7M.
(b) medium segment - Revenue at list price $12M, Discounts from list price $0.7M,
(c) large segment - Revenue at list price $15M, Discounts from list price $1.25M,
Cost of goods sold $9M, Delivery and Ordering costs $1.05M.
Additional information:
- Distribution costs are $1.2M distributed in the proportion of 3:4:5 for small, medium
and large respectively
- Corporate sustaining costs are $0.8M in the proportion of 1:3:4 for small, medium
and large respectively.
What is the profit or loss of the large segment using the customer cost hierarchy
report?
Answer: $2,800,000 (see working below)
10. Hayeraft Inc. has three customer segments; (a) small, (b) medium and (large). The
following information is provided:
(a) small segment - Revenue at list price $10M, Discounts from list price $0.5M,
(b) medium segment - Revenue at list price $12M, Discounts from list price $0.7M,
(c) large segment - Revenue at list price $15M, Discounts from list price $1.25M,
Cost of goods sold $9M, Delivery and Ordering costs $1.05M.
Additional information:
- Distribution costs are $1.2M distributed in the proportion of 3:4:5 for small, medium
and large respectively
- Corporate sustaining costs are $0.8M in the proportion of 1:3:4 for small, medium
and large respectively.
What is the profit or loss of the medium segment using the customer cost hierarchy
report?
Answer: $2,500,000 (see working below)
Figure 1 - Workings for questions 9 and 10

Small Medium Large
Sales at list price $10,000,000 $12,000,000 $15,000,000
Less discounts $500,000 $700,000 $1,250,000
Net Sales $9,500,000 $11,300,000 $13,750,000
Cost of goods sold $6,800,000 $7,500,000 $9,000,000
Gross Margin $2,700,000 $3,800,000 $4,750,000
Customer-level operating cost
Delivery and ordering cost $700,000 $600,000 $1,050,000
Distribution cost $300,000 $400,000 $500,000
Corporate sustaining cost $100,000 $300,000 $400,000
$1,100,000 $1,300,000 $1,950,000
Profits $1,600,000 $2,500,000 $2,800,000

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Answers to Quiz 5

2. What internal action can be taken by a company, in the following scenario to

3. Which costing approach is most suitable for customer profitability analysis?

4. Customer profitability analysis is an antecedent exercise which allows a company to

5. Customer life time value is particularly useful to:

6. In developing strategies to eliminate less profitable or non-profitable customers

Figure 1 - Workings for questions 9 and 10

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