How might Astel’s managers use the fully allocated customer-profitability analysis in Exhibit 15-10? As we discussed in Chapter 14 when discussing product pricing, managers frequently favor using the full cost of a product when making pricing decisions. There are similar benefits to calculating fully allocated customer costs.
Consider, for example, Customer E, who shows a profitability of $24,000 in Exhibit 15-10. If this customer demanded a price reduction of $50,000, how should the Provalue Division respond? Based on the analysis in Exhibit 15-4, Customer E shows a profitability of $100,000 and it would appear that even a $50,000 reduction in price would still leave Customer E as a profitable customer. But in the long run, Customer E must generate sufficient profits to recover all the division-support costs of the Provalue Division and the corporate costs of Astel. A $50,000 reduction in price may not be sustainable in the long run. As the Provalue Division begins making plans for Provalue II in 2020 (see Chapter 14), it simultaneously must consider what it can do to better manage its customers to improve profitability.
Another advantage of allocating costs to customers is that it highlights opportunities to manage costs. For example, the manager of the wholesale channel might want to probe whether the amounts spent on corporate advertising or on R&D and design help in promoting sales to wholesale customers. These discussions might prompt a reevaluation of the amount and type of advertising, R&D, and design activity.