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Business Learning Center, AIS 211

Fall 2016
Chapter 6 Day 2 Check Figures

Question 1: CLV Bank prepared the following information about the first five years of its relationship
with the customer below. Costs (ct) were incurred to promote customer retention to a rate of 0.8 in
years 1-5.

Initial acquisition cost $100


n = number of years retained 5
r = retention rate for each of the n years 0.8
retained
Cost of capital 0.1
Mt = margin from customer in year t
M1 $50
M2 40
M3 50
M4 80
M5 150
c1 20
c2 10
c3 10
c4 8
c5 40

a) What costs could ct contain?


Any additional costs to serve and retain the customer for that year.

b) Compute this customers lifetime value.


$19.49

Question 2: Luxury Hotels Inc. conducted customer satisfaction survey with one question: How likely is
it that you would recommend Luxury Hotels to a friend or colleague? Responses on a scale of 1 to 10
are listed below.

Score Number of Responses


10 300
9 700
8 890
7 621
6 103
5 405
4 213
3 50
2 40
1 33
Total 3,355

a) Compute Luxury Hotels net promoter score. 4.65%

b) What must a company satisfy in order for their customers to recommend the company to a friend or
colleague?

The following two dimensions must be satisfied: 1) The product or service must offer superior value for
the money and they feel good about the relationship they have with the company and 2) they are
confident that the company will treat their friends and colleagues well should problems emerge.

Question 3: Tetra Companys cost system assigns MSDA expenses to customers using a rate of 33% of
sales revenue. The new controller has discovered that Tetras customers differ greatly in their ordering
patterns and interactions with Tetras sales force. Because the controller believes Tetras cost system
does not accurately assign MSDA expense to customers, she developed an activity-based costing system
to assign these expenses to customers. She then identified the following MSDA costs for two customers,
Ashton and Brown:

Ashton Brown
Sales representative travel $9,000 42,000
Service customers 15,000 110,000
Handle customer orders 1,000 12,000
Ship to customers 24,000 72,000

The following additional information is available:

Ashton Brown
Sales 430,000 350,000
COGS 220,000 155,000

a) Using the current cost systems approach of assigning MSDA expenses to customers using a rate of
33% of sales revenue, determine the operating profit associated with Ashton and with Brown

b) Using the ABC information provided, determine the operating profit associated with Ashton and
Brown.
(a) Ashton Brown

Sales $430,000 $350,000

Cost of goods sold $220,000 $155,000

Gross margin $210,000 $195,000

Marketing, selling, distribution, and

administrative expenses: 33% sales $141,900 $115,500

Operating profit $68,100 $79,500

Operating profit/Sales 15.84% 22.71%

(b) Sales $430,000 $350,000

Cost of goods sold $220,000 $155,000

Gross margin $210,000 $195,000

Marketing, selling, distribution, and

administrative expenses

Sales representative travel $9,000 $42,000

Service customers 15,000 110,000

Handle customer orders 1,000 12,000

Ship to customers 24,000 72,000

Total activity expenses $49,000 $236,000

Operating profit $161,000 $41,000

Operating profit/Sales 37.44% 11.71%

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