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Analyzing Customer Profitability

Analyzing Customer Profitability
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Analyzing Customer Profitability: Lauden Conference Solutions Specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent. On a recent job for Orvieto industries, the company set its price as follows: Production costs including podiums, seating, lighting , etc $150,000 Installer Salaries: $25,000 Total $175,000 Markup at 35 percent $61,250 Bid Price $236,250 The job turned out to be a big hassle. Orvieto requested 25 change orders, although the dollar value of the products it requested changed very little. The company also returned 30 items that had extremely minor flaws (Scratches that were barely visible and would be expected in normal shipping) Orvieto also requested seven meetings with designers taking 35 hours before its plans were finalized. Normally oly two or three meetings are necessary. Nancy Jackson, controller for Lauden, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the following drivers: Driver Annual Value of Driver Annual Cost Change order 800 change orders $200,000 Number of returns 1000 product returns $70,000 Design meeting hours 1250 meeting hours $75,000 Required: A) Calculate the indirect service costs related to the job performed for Orvieto industries. B) Assuming that orvieto industries cause a disproportionate amount of indirect service costs, how should Lauden deal with this situation?

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