what is the usefulness of conducting a customer profitability analysis? course hero

Customer Profitability Analysis is a tool from managerial accounting that shifts the focus from product line profitability to individual customer profitability. Activity Based Costing looks at the various cost drivers to accurately isolate costs and determine a product’s profitability.

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What is Customer Profitability Analysis and why is it important?

By examining Customer Profitability rather than just sales, the company will gain a more accurate insight into which customer segment is the stronger driver of its overall profitability. The biggest criticism regarding Customer Profitability Analysis is the selection of a limited time frame and segmentation criteria.

What is the difference between activity based costing and Customer Profitability Analysis?

to individual customer profitability. Activity Based Costing looks at the various cost drivers to accurately isolate costs and determine a product’s profitability. In contrast, Customer Profitability Analysis is a method of looking at the various activities and expenses incurred in servicing a particular customer.

How do you calculate customer profitability?

Calculating customer profitability begins by identifying the various costs incurred specifically in relation to servicing a specific customer or segment of customers. For example, a solar panel company serves two types of customers: Individuals and Small Medium Enterprises (SMEs).

How to avoid the high costs of low profit customers?

To avoid the high costs of low profit customers, you should perform an annual analysis of customer profitability. Therefore, weed your garden of customers who are sapping your profits and cash flow.

What is customer profitability analysis?

In contrast, Customer Profitability Analysis is a method of looking at the various activities and expenses incurred in servicing a particular customer. In other words, it focuses on analyzing profit per customer rather than profit per product.

What is the biggest criticism of customer profitability analysis?

The biggest criticism regarding Customer Profitability Analysis is the selection of a limited time frame and segmentation criteria. However, with the emergence of Big Data, customer profitability can be calculated using new methods that determine a customer’s lifetime value rather than just the sales within a restricted time frame.