## 3.1. Example of customer cost analysis

To better understand how customer cost analysis is done, let's look at the following example.

Friends Company, a manufacturer of valves, has the following customer costs and cost rates:

 Activity Cost Driver Cost Rate Order taking Orders taken \$25 per order Order processing Processed orders \$18 per order Order processing Processed items \$1.25 per item Delivery Number of orders \$120 per order Delivery Miles \$ 1 per mile Expedited delivery Number of expedited orders \$600 per order Customer visits Number of visits \$160 per visit Monthly billing First statement \$6 per statement Monthly billing Subsequent reminders \$15 per reminder Sales returns Number of returns \$80 per return Restocking Number of items returned \$5 per item returned

Friends Company also incurred the following costs: \$120,000 per month in sales personnel salaries and \$60,000 per month in office expenses.

The abovementioned costs, as well as the costs in the table above, can be grouped as follows:

 Customer Cost Category Customer Cost Customer unit-level costs Order processing (per unit) Restocking Customer batch-level costs Order taking Order processing (per order) Delivery (per order) Delivery (per mile) Expedited delivery Sales returns Customer-sustaining costs Sales visits Monthly billing (1st statement) Monthly billing (subsequent reminders) Sales-sustaining costs Sales office salaries Sales office expenses

To perform a customer cost analysis, let's continue the Friends Company's example. Friends Company has the following three customers: AutoCo, Motor, Inc., and Fast Bike LLC. The following data pertains to the aforementioned clients:

 AutoCo Motor, Inc. Fast Bike LLC Total sales \$ 100,000 \$ 360,000 \$ 450,000 Sales discounts 2,000 8,000 14,000 Sales returns and allowance 12,000 15,000 65,000 Cost of goods sold 56,000 260,000 302,000 Number of orders 7 16 44 Average items per order 500 380 150 Delivery miles 20 35 46 Number of expedited orders 0 1 6 Number of customer visits 1 2 4 Number of reminders 0 1 4 Sales returns 2 3 12 Average units per return 30 34 20

Let's look in greater detail at the calculation of the total customer cost of Motor, Inc.

 Motor, Inc. Activity Cost (\$) Calculation Order taking 400 = \$25 per order x 16 orders Order processing (per order) 288 = \$18 per order x 16 orders Order processing (per item) 7,600 = \$1.25 per item x 16 orders x 380 items per order Delivery (per order) 1,920 = \$120 per order x 16 orders Delivery (per mile) 560 = \$1 per mile x 16 orders x 35 miles Expedited delivery 600 = \$600 per order x 1 order Customer visits 320 = \$160 per visit x 2 visits Monthly billing (1st statement) 6 = \$6 per statement x 1 statement Monthly billing (reminder(s)) 15 = \$15 per reminder x 1 reminder Sales returns 240 = \$80 per return x 3 returns Restocking 510 = \$5 per item x 3 returns x 34 items per return Total \$ 12,459

Using the formulas presented in the table above, we can calculate the customer cost of AutoCo and Fast Bike LLC. The customer cost analysis of the Friends Company's three clients is as follows:

 AutoCo Motor, Inc. Fast Bike LLC Order taking \$ 175 \$ 400 \$ 1,100 Order processing (per order) 126 288 792 Order processing (per item) 4,375 7,600 8,250 Delivery (per order) 840 1,920 5,280 Delivery (per mile) 140 560 2,024 Expedited delivery 0 600 3,600 Customer visits 160 320 640 Monthly billing (1st statement) 6 6 6 Monthly billing (reminder(s)) 0 15 60 Sales returns 160 240 960 Restocking 300 510 1,200 Total \$ 6,282 \$ 12,459 \$ 23,912

After we have determined the cost of each customer, now we can perform the customer profitability analysis.

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