ACC 430 Module 7 Project Two Example

Who Pays the Bills? Customer Profitability and Cost to Serve at a Composite Janitorial Supply Distributor

[Student Name]

Southern New Hampshire University

ACC 430: Data Analytics for Financial Professionals

Project Two

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Who Pays the Bills? Customer Profitability and Cost to Serve at a Composite Janitorial Supply Distributor

The Answer

Margins are not falling evenly. Product margins differ only modestly by customer type, but the cost of serving customers differs greatly, and the company's smallest restaurant accounts cost more to serve than they earn. Restaurants generate $14.2 million of sales but only $0.59 million of contribution after cost to serve, and 610 of the 1,240 restaurant accounts lose money. Three changes, a minimum order for free delivery, less frequent delivery for small accounts and online ordering, could add about $0.7 million a year, and a pilot on two routes will test customer reaction before rollout.

Data and Method

The analysis uses the cleaned invoice data from Module Two, reconciled to the general ledger, for revenue and product cost by customer. Delivery cost per customer comes from the regression in Project One: about $14.20 per stop, $1.65 per mile and $18 per thousand pounds, applied to each customer's actual deliveries. Order handling is assigned at $19 per order, the warehouse and customer service cost per order from a time study. Returns are assigned at the cost of processing each return, and collection cost combines bad debt write-offs and the carrying cost of receivables at each customer's actual days outstanding. Kaplan and Cooper (1998) argue that customer costs should be assigned by the activities customers actually consume rather than as a percentage of sales, which is the principle followed here.

Contribution by Segment

Table 1. Annual Contribution by Segment (millions of dollars)

Restaurants account for 12 percent of revenue but 29 percent of cost to serve, the single most important figure in this report. The reason is order pattern: restaurants placed 31,000 orders last year, more than any other segment, with an average order of about $460, compared with $4,300 for schools. They also returned more product and paid more slowly.

The Whale Curve

Ranking all 2,600 customers by contribution and plotting cumulative contribution produces the classic whale curve. The most profitable 30 percent of customers generate about 125 percent of total contribution; the curve then flattens and falls as less profitable customers are added, ending at 100 percent. The least profitable quarter of customers reduces total contribution by about 18 percent, and most of them are small restaurants and a few small offices ordering several times a week. Datar and Rajan (2021) note that this shape is common and that its value lies in showing management which customers to serve differently rather than which to drop.

Options Evaluated

Table 2. Options and Estimated Annual Effect

The estimates assume that 80 percent of affected customers stay and adjust their ordering, based on the experience of a peer distributor that introduced a similar fee. If only 60 percent stayed, the combined effect would fall to about $0.45 million.

Why Not Drop the Unprofitable Accounts?

The simplest response to the whale curve would be to stop serving the 610 restaurant accounts that lose money. That would be a mistake for three reasons. First, many of those accounts lose money because of how they order, not what they buy; with larger, less frequent orders they would become profitable. Second, some delivery costs would not disappear if the accounts left: the trucks would still run the same routes for other customers, so the saving would be smaller than the allocated cost suggests. Third, several restaurant owners also buy for other businesses or influence purchasing at larger accounts, and losing them could cost more than it saves. Kaplan and Cooper (1998) make the same point about activity-based customer analysis: its purpose is to change how customers are served and priced, and dropping customers is a last resort after those changes fail.

Sensitivity of the Findings

Because cost to serve rests on estimates, the analysis was rerun with the per-order handling cost at $15 and $23 instead of $19, and with delivery cost per stop at the lower and upper bounds of the regression's confidence interval. In every case restaurants remained the lowest-contribution segment and between 520 and 690 restaurant accounts showed negative contribution. The conclusion does not depend on the precise cost figures.

Recommendation and Pilot

The company should adopt all three changes, starting with a 90-day pilot on two routes with many restaurant accounts, comparing their results with two similar routes left unchanged. The pilot will measure order size, order frequency, customer retention, contribution per account and complaints, each reported weekly to the CFO and the sales director so problems surface quickly. If retention stays above 85 percent and contribution per account rises, the changes roll out company-wide. Richardson et al. (2021) describe tracking outcomes as the final step of the analytics cycle, and the pilot builds that step in from the start.

Tracking

After rollout, the CFO's dashboard will add contribution by segment and the share of orders below $250 as monthly measures. The customer profitability analysis will be rerun quarterly, with cost drivers updated annually, and sales representatives will receive a monthly list of their accounts below the profitability line so they can discuss ordering patterns with those customers before any fee is applied.

Conclusion

The distributor's margin problem is a cost-to-serve problem concentrated in small, frequent orders, mostly from restaurants. A minimum order for free delivery, less frequent delivery for small accounts and online ordering could add about $0.7 million a year, and a pilot will test customer reaction before the changes are applied everywhere.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Kaplan, R. S., & Cooper, R. (1998). Cost and effect: Using integrated cost systems to drive profitability and performance. Harvard Business School Press.

Richardson, V. J., Teeter, R. A., & Terrell, K. L. (2021). Data analytics for accounting (2nd ed.). McGraw Hill.