Customer Profitability Analysis and Cost Optimization for Louise Fairbern

This report analyzes the customer profitability and cost optimization for Louise Fairbern. It includes a customer profitability analysis, distribution channel cost report, and activity-based customer cost report for 5 major customers. The report recommends optimizing general and specific overheads to increase profitability for the consulting business division and reviewing fixed and other overheads to lower costs and increase profitability for the commercial window treatment business division.

Table of Contents
Scenario 1: Customer Profitability..............................................................................................................2
Question 1...............................................................................................................................................2
Question 2...............................................................................................................................................3
Introduction.............................................................................................................................................3
Analysis:...................................................................................................................................................3
Recommendation....................................................................................................................................4
Conclusion...............................................................................................................................................4
References...................................................................................................................................................5

Scenario 1: Customer Profitability
Question 1
Louise Fairbern has 5 major customers in 2 different businesses for which the customer
profitability reports including activity based customer-cost report, distribution channel cost
report and a customer-profitability analysis for all the 5 customers has been shown below:
Customer Profitability Analysis
Particulars Adams Betz Chatham Dedham Elm
Sales 234,000 188,800 357,380 147,840 73,200
Less: Discount (23,400) - - - (3,660)
Less: Direct Cost (147,000) (117,200) (218,400) (115,720) (57,040)
Contribution 63,600 71,600 138,980 32,120 12,500
Less: Specific Fixed Cost (Note 1) (47,350) (37,751) (76,018) (40,276) (19,866)
Profit 16,250 33,849 62,962 (8,156) (7,366)
Note 1
Total Specific fixed costs attributable 85,100 136,160 221,260
Allocation on basis of direct costs
To Adam out of 85100 55.64%
To Betz out of 85100 44.36%
To Chatham out of 136160 55.83%
To Dedham out of 136160 29.58%
To Elm out of 136160 14.59%
Amount to of specific overhead to be allocated to Adam 47,349
Amount to of specific overhead to be allocated to Betz 37,751
Amount to of specific overhead to be allocated to Chatham 76,018
Amount to of specific overhead to be allocated to Dedham 40,276
Amount to of specific overhead to be allocated to Elm 19,866
Distribution Channel Cost report
Particulars Architectural Business Window Treatment Buisness
Direct Costs 264,200 391,160
Specific Overhead 85,100 136,160
Non Specific Overhead 59,570 59,570
Discount 23,400 3,660
Total Cost 432,270 590,550

Activity Based Customer Cost report
Particulars Adams Betz Chatham Dedham Elm
Direct Costs 147,000 117,200 218,400 115,720 57,040
Discount 23,400 - - - 3,660
Total Activity Based Costs 170,400 117,200 218,400 115,720 60,700
Question 2
Report on customer costs, Customer Profitability, Distribution Channel profitability and
Total Profitability:
Introduction
In the given case study, we can see that Louise Fairborn is a business conducted by Louise and
has 2 major divisions namely interior designing consulting and window treatment fabrication.
The company has 5 major customers over 2 business divisions (Dichev, 2017). The customers
are Adam and Betz from the interior designing consulting business and rest 3 customers namely
Chatham, Dedham and Elm belonging to the window treatment fabrication business. Adam and
Chatham are 2 major customers in terms of contribution to the overall revenues. 10% discount is
being given to Adam to lure the customer as against its customer and 5% discount is being given
to Elm on account of advance payment being made by customer (Belton, 2017). Out of the entire
overheads, 65% is directly attributable to the 2 businesses and the rest 35% is of general in
nature.
Analysis:
Consulting Business Division: In case, the contribution margin is being analyzed, the same is
37.92% for Betz which is much higher than Adam’s 27.25%. This is inspite of the fact that
Adam is the biggest contributor to the revenue but this low contribution margin is attributable to
a number of reasons like 10% discount in pricing being given to Adam, there might also be use
of high quality material and highly trained laborers which may be contributing to higher direct
costs. All this cumulatively has resulted in lower profits (Goldmann, 2016).
Commercial Window Treatment: In case the contribution margin is analyzed in this division, the
same is 38.89%, 21.72% and 17.07% for Chatham, Dedham and Elm respectively. It is clearly
visible that the margin for Dedham and Elm is very low as compared to Chatham and the main
reason is the allocation of the direct costs percentages. The direct cost ratio for Dedham and Elm
is 78.27% and 82.02% respectively as against Chatham which has 61.11% (Linden & Freeman,

2017). Furthermore, since the overheads are also being allocated based on the direct costs
percentages, the share for Dedham and Elm is on the higher side. The overheads to contribution
percentage for Chatham, Dedham and Elm is 54.7%, 125.4% and 159% respectively, which
literally makes the Dedham and Elm to be loss bearing
Recommendation
Consulting business Division: This division has been doing well in terms of overall profitability
for the company but it needs to optimize the general and specific overheads to increase the
profitability further as the price cannot be increased in a perfectly competitive market (Jefferson,
2017). It is because of the higher costs that the business is in loss inspite of higher contribution
margin. Some of the steps to improve the profitability is outsourcing the division to 3rd party,
revising the salary structure and making variable compensation based on performance of
company, lowering the administrative and other fixed costs (Clarke, 2013).
Commercial Window Treatment business: In this division, since the customers Dedham and Elm
are running into losses, a greater outlook and review of the fixed and other overheads is required
to lower the costs and increase the profitability (Heminway, 2017). The direct costs including
material and labour also needs to be optimized in order to make company profitable. Better
negotiation with material vendors, use of skilled labour, monitoring of productive hours,
lowering overheads as well as discount given to Elm are some of the measures that can be taken
in this regard.
Conclusion
From the above discussion and analysis, we can see that the only way of increasing the
profitability is cost cutting, optimization, monitoring and management. Overheads and direct
costs, if lowered, can result into increase in profitability (Visinescu, et al., 2017). Furthermore,
the business should also plan of expanding the horizons and the customer base.

References
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Clarke, J., 2013. Australian Contract Law. [Online]
[Accessed 8th August 2016].
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.