Question

Pet Toys Inc. has four customers. Details on revenues and expenses are presented below. Customer A Customer B Customer C Customer D
Units sold 10,000 20,000 35,000 50,000
Sales $100,000 $150,000 $200,000 $250,000
Cost of goods sold 50,000 60,000 70,000 75,000
Delivery cost 10,000 25,000 30,000 50,000
Order taking 15,000 20,000 25,000 30,000
Administration 30,000 30,000 30,000 30,000
Depreciation 20,000 20,000 20,000 20,000
Utilities 10,000 10,000 10,000 10,000
Profit / (Loss) $(35,000) $(15,000) $15,000 $35,000
Which customer has the highest customer level operating profit per unit sold?
a. Customer A.
b. Customer B.
c. Customer C.d. Customer D.

Answer 1

Answer:

a. Customer A.

Explanation:

operating profit = EBIT

in this case, the company allocates fixed operating costs equally, which is incorrect since the sales volumes are very different. Fixed operating costs should be allocated proportional to the amount of units sold:

total fixed operating costs = ($30,000 x 4) + ($20,000 x 4) + ($10,000 x 4) = $240,000

total sales = 10,000 + 20,000 + 35,000 + 50,000 = 115,000 units

fixed operating costs per unit = $240,000 / 115,000 = $2.08696 per unit

                                               A                B                   C                D

units sold                        10,000         20,000        35,000        50,000

sales                               $100,000     $150,000    $200,000   $250,000

total variable costs        $75,000       $105,000    $125,000    $155,000

allocated fixed costs     $20,869       $41,739       $73,044       $104,348

EBIT per customer         $4,131            $3,261        $1,956         -$9,348

EBIT per unit                   $0.41            $0.16           $0.06          -$0.19

Since customer A's EBIT per unit sold is higher, then it is the client with the highest customer level operating profit per unit sold.