Reference no: EM132893659
Question - Change in customer segments (LO1). N&N Sanitation offers waste management services for residential and commercial clients. The following select operating data are available:
|
|
Residential
|
Commercial
|
Total
|
|
Number of customers
|
500
|
100
|
600
|
|
Number of pickups per week
|
500
|
500
|
1000
|
|
Revenue
|
$800,000
|
$1,200,000
|
$2,000,000
|
|
Variable Costs
|
$140,000
|
$240,000
|
$380,000
|
|
Traceable fixed costs
|
$150,000
|
$225,000
|
$375,000
|
|
Common fixed costs
|
NA
|
NA
|
$1,100,000
|
Believing its commercial customers to be more profitable, N&N is thinking of moving its business more toward that business segment. Management would like to see a mix of 200 residential and 300 commercial clients in three years' time.
Required -
a. Estimate the change in profit arising from the change in product mix, assuming that that traceable and fixed common costs do not change from current levels.
b. Suppose N&N believes that, in the long run, fixed costs would change in proportion to sales revenue. Calculate the expected profit with the new customer mix. Allocate common fixed costs in proportion to the revenue from the two segments when performing this exercise.
c. Repeat the exercise in part (b), except allocate common fixed costs to segments and in proportion to the number of pickups from each segment. That is, assume that pickups are the cost driver for traceable and common fixed costs.
d. Which of the three estimates, for parts (a) through (c), is likely to be a good estimate of N&N's profits three years hence if it changes its customer mix as indicated?