Time Solutions, Inc. is an employment services firm that places both temporary and permanent workers with a variety of clients. Temporary placements account for 70% of Time Solutions’ revenue; permanent placements provide the remaining 30%. President Gia Johnson recently read an article that discussed the need to consider selling and administrative costs in determining customer profitability—a practice that Time Solutions does not follow. Johnson is concerned that the company may be making poor choices in the selection of customers.
In the temporary market, Time Solutions advertises and searches for workers, hires them, and pays them for the hours they work. The company then bills customers for an amount that is higher than the workers’ pay plus employment taxes. Because the temporary market is very competitive, Time Solutions has had to reduce the rates charged to customers to keep their business.
After reviewing the year’s operations, Johnson has determined that the company’s customer service activities for the temporary business could be divided into three cost pools: filling work orders, hiring temporary employees, and processing payroll/billing customers. The following table shows the three cost pools and their annual capacity:
Time Solutions’ largest four customers’ account for about 52% of total sales, so Johnson has decided to analyze those customers’ accounts first to determine how much they are contributing to the bottom line. The gross margin the companies generate and the activities they use are as follows:
Required
a. Calculate the gross margin percentage for each customer. Round gross margin percentage to 1 decimal place.
b. Determine the activity rates for each of the three cost pools.
c. Determine the customer net profit and customer profit margin for each customer. Round dollar amounts to whole dollars and customer profit margin to 1 decimal place.
d. What suggestions would you make for managing each customer’s profitability?
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