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PROBLEM B–5 Customer Profitability and Managerial Decisions [LO1, LO3]
FirstLine Pharmaceuticals, Inc., is a wholesale distributor of prescription drugs to independent retail and hospital-based pharmacies. Management believes that top-notch customer representa- tives are the key factor in determining whether the company will be successful in the future. Customer representatives serve as the company’s liaison with customers—helping pharmacies monitor their stocks, delivering drugs when customer stocks run low, and providing up-to-date information on drugs from many different companies. Customer representatives must be ultra- reliable and are highly trained. Good customer representatives are hard to come by and are not easily replaced.
Customer representatives routinely record the amount of time they spend serving each phar- macy. This time includes travel time to and from the company’s central warehouse as well as time spent replenishing stocks, dealing with complaints, answering questions about drugs, informing pharmacists of the latest developments and newest products, reviewing bills, explaining proce- dures, and so on. Some pharmacies require more hand-holding and attention than others and con- sequently they consume more of the representatives’ time.
Recently, customer representatives have increasingly complained that it is impossible to do their jobs without working well beyond normal working hours. This has led to an alarming increase in the number of customer representatives quitting for jobs in other organizations. As a consequence, management is considering dropping some customers to reduce the workload on ustomer representatives. Data concerning a representative sample of the company’s customers appears below:
|
|
Willows Pharmacy |
Swedish Hospital Pharmacy |
Georgetown Clinic Pharmacy |
Kristen Pharmacy |
|
Total revenues . . . . . . . . . . . . . . . . . . . |
$344,880 |
$1,995,200 |
$1,414,170 |
$154,800 |
|
Cost of drugs sold . . . . . . . . . . . . . . . . |
$263,340 |
$1,446,520 |
$1,047,660 |
$120,960 |
|
Customer service costs . . . . . . . . . . . . |
$12,240 |
$62,640 |
$39,900 |
$4,500 |
|
Customer representative time . . . . . . . |
180 |
1,160 |
570 |
90 |
Customer service costs include all of the costs—other than the costs of the drugs themselves— that could be avoided by dropping the customer. These costs include the hourly wages of the customer representatives, their sales commissions, the mileage-related costs of the customer repre- sentatives’ company-provided vehicles, and so on.
Required:
1. Rank the four customers in terms of their profitability.
2. Customer representatives are currently paid $25 per hour plus a commission of 1% of sales revenues. If these four pharmacies are indeed representative of the company’s customers, could the company afford to pay its customer representatives more in order to attract and retain customer representatives?
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