Jack Johnson, owner of Johnson Beverage, has just received notice that one of his largest and most loyal customers may want to negotiate a lower price for its product purchases. Information compiled by Johnson’s accountant, where customer service costs are allocated to customers as a percentage of revenue, suggests that profit margin on the customer is too low to withstand a price decrease. Students are asked to design an activity-based system for allocating customer service costs and to use it to estimate customer profitability for several customers. The revised costs reflect that the customer places low demands on customer service resources and is sufficiently profitable to permit Johnson Beverage to negotiate on price to preserve the business. Additional analysis identifies some unprofitable customers, previously thought to be profitable, that offer opportunities for strategic decisions that lead to profit improvement.
Darden Business Publishing – University of Virginia