Customer profitability analysis. Squeaky Clean, a commercial laundry service, ha
ID: 2490517 • Letter: C
Question
Customer profitability analysis. Squeaky Clean, a commercial laundry service, has two clients, Super 6 Motel and Seaside Inn. The following is information about Squeaky’s revenues and costs (in thousands) by customer for the previous year.
Super 6 Motel
Seaside Inn
Total
Revenues (fees charged)…………………………………………
$230
$350
$580
Operating Costs
Cost of Services (variable)………………………………………..
$212
$305
$517
Salaries, Rent, and General
Administration (fixed)…………………………………………….
20
35
55
Total Operating Costs……………………………………………….
$232
$340
$572
Operating Profits………………………………………………..
$2
$10
$8
The analysis apparently shows that Super 6 Motel is not profitable for Squeaky. Use differential analysis to decide whether Squeaky should discontinue the Super 6 Motel account.
Super 6 Motel
Seaside Inn
Total
Revenues (fees charged)…………………………………………
$230
$350
$580
Operating Costs
Cost of Services (variable)………………………………………..
$212
$305
$517
Salaries, Rent, and General
Administration (fixed)…………………………………………….
20
35
55
Total Operating Costs……………………………………………….
$232
$340
$572
Operating Profits………………………………………………..
$2
$10
$8
Explanation / Answer
uNDER Differential costing we will consider only those costs thar are associated with providing services.
Company should not discard Super 6 motel from its customer base as it is giving us contribution margin of 18000, which will be used to cover up companies fixed cost .
Fixed costs are not taken in Above calculations as these are sunk cost and specifically allocation of companies fixed cost to two customers. If Motel 6 is discontinued ,Burden of recovery of Fixed salaries, expense recovered etc, will fall on income from Seaside Inn.
Super 6 Seaside Motel Inn Revenues 230 350 Relevant cost - Variable operating costs 212 305 Contribution Earned 18 45Related Questions
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