Victory Products Ltd manufactures high-technology products for the computer industry. Victory’s accountant has produced a profit report showing the profitability of each of its three main customers for last year.
Victory Products profit report.
|
|
Franklin |
Engineering |
Zeta PLC |
Other |
Total |
|
Sales |
1,000,000 |
1,500,000 |
2,000,000 |
1,500,000 |
6,000,000 |
|
Cost of materials |
250,000 |
600,000 |
750,000 |
750,000 |
2,350,000 |
|
Cost of labour |
300,000 |
200,000 |
300,000 |
75,000 |
875,000 |
|
Gross profit |
450,000 |
700,000 |
950,000 |
675,000 |
2,775,000 |
|
Corporate overheads: allocated as 30% of sales |
300,000 |
450,000 |
600,000 |
450,000 |
|
|
Rental |
|
|
|
|
250,000 |
|
Depreciation |
|
|
|
|
350,000 |
|
Non-production salaries |
|
|
|
|
600,000 |
|
Selling expenses |
|
|
|
|
350,000 |
|
Administration |
|
|
|
|
250,000 |
|
Operating profit |
150,000 |
250,000 |
350,000 |
225,000 |
975,000 |
Victory is operating at almost full capacity, but wishes to improve its profitability further. The accountant has reported that, based on the above figures, Franklin Industries is the least profitable customer and has recommended that prices be increased. If this is not possible, the accountant has suggested that Victory discontinues selling to Franklin and seeks more profitable business from Engineering Partners and Zeta.
Labour is the most significant limitation on capacity. It is highly specialized and is difficult to replace. Consequently, Victory does all it can to keep its workforce even where there are seasonal downturns in business. The company charges £100 per hour for all labour, which is readily transferable between each of the customer products.
You have been asked to comment on the accountant’s recommendations.