ACCA Strategic Professional · Advanced Performance Management · Strategic management accounting
Orrin Foods sells packaged snacks and is reviewing customer profitability. Customer A buys large volumes but demands frequent small deliveries, bespoke packaging and extended credit. Customer B buys less but orders in standard full pallets and pays promptly. Management wants to identify which customer is truly more profitable. Which technique is most appropriate?
Customer profitability analysis using activity-based cost drivers is most appropriate. It assigns the costs of deliveries, special packaging and credit to the customers who cause them, revealing the true cost to serve. Revenue ranking or revenue-based overhead allocation ignores these differences and may wrongly favour the high-volume, demanding customer.
- ACustomer profitability analysis using activity-based cost driversCorrect
- BRanking customers by sales revenue
- CComparing gross margin percentages on product lines only
- DCalculating each customer's share of total fixed overheads by revenue
Explanation
Customer profitability analysis traces costs of delivery, packaging and credit to customers via cost drivers, revealing the cost to serve. Ranking by revenue or gross margin ignores these costs, and allocating overheads by revenue simply spreads cost without reflecting consumption, so it would hide Customer A's high cost to serve.
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