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Remington Aeronautics LTD is a British aeronautics company that designs and manufactures electronic control systems for commercial airlines. The vast majority of all commercial aircraft are manufactured by Boeing in the U.S. and Airbus in Europe; however, there is a relatively small group of companies that manufacture narrow-body commercial jets. Assume for this exercise that Remington does contract work for the two major manufacturers plus three companies in the second tier.

Because competition is intense in the industry, Remington has always operated on a fairly thin 20% gross profit margin; hence, it is crucial that it manage non-manufacturing overhead costs effectively in order to achieve an acceptable net profit margin. With declining profit margins in recent years. Remington Aeronautics CEO, John Remington, has become concerned that the cost of obtaining contracts and maintaining relations with its five major customers may be getting out of hand. You have been hired to conduct a customer profitability analysis.

Remington Aeronautics non-manufacturing overhead consists of $2.5 million of general and administrative (G&A)expense, (including, among other expenses, the CEOs salary and bonus and the cost of operating the companys corporate jet) and selling and customer support expenses of $3 million (including 5% sales commissions and $1,050,000 of additional costs).

The accounting staff determined that the $1,050,00 of additional selling and customer support expenses related to the following four activity cost pools:

Activity Activity Cost Driver Cost per Unit of Activity

1. Sales visits.Number of visit days $1,400
2. Product adjustmentsNumber of adjustments 1,200
3. Phone and email contactsNumber of calls/contacts 200
4. Promotion and entertainment events.Number of events 1,600

Financial and activity data on the five customers follows (Sales and Gross Profit data in millions):

Quantity of Sales and Support Activity ________

Customer Sales Gross Profit Activity 1 Activity 2 Activity 3 Activity 4

A.$17 $3.4 106 23 220 82

B. 12 2.4 130 36 354 66

C. 3 0.6 52 10 180 74

D. 4 0.8 34 6 138 18

E.. 3_ 0.6 16 5 104 10

$39 $7.8 338 80 996 250

In addition to the above, the sales staff used the corporate jet at a cost of $800 per hour for trips to customers as follows

Customer A24 hours

Customer B36 hours

Customer C5 hours

Customer D0 hours

Customer E0 hours

The total cost of operating the airplane is included in general and administrative expense; none is included in selling and customer support costs.

Required

1. Prepare a customer profitability analysis for Remington Aeronautics that shows the gross profits less all expenses that can reasonably be assigned to the five customers.
2. Now assuming that the remaining general and administrative costs are assigned to the five customers based on relative sales dollars, calculate net profit for each customer.
3. Discuss the merits of the analysis in part a. versus part b.

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