Circle Group LLP currently provides consulting services to three clients (A, B,
ID: 2482752 • Letter: C
Question
Circle Group LLP currently provides consulting services to three clients (A, B, and C). It is in the process of evaluating the profitability of each client with a view to possibly dropping one or more of the clients. A detailed analysis of each client’s account for the most recent month follows
Revenue
Variable costs
Client-specific fixed costs
Share in company-wide fixed costs
Operating profit (loss)
Client A
Client B
Client C
Total
92,000
106,000
47,000
245,000
75,100
63,000
37,600
175,700
15,909
26,428
12,363
54,700
8,091
12,672
5,137
25,900
(7,100)
3,900
(8,100)
( 11,300)
Variable costs for each client form a constant percentage of the client’s fee. Fixed costs consist of both company-wide and client-specific fixed costs. Company-wide fixed costs have been allocated across clients in proportion to the sales fee collected from each client. Client-specific fixed costs could be avoided if the respective client is lost.
1. Based on this information Circle Group is planning to drop clients A and C. Predict the new level of operating profit if the company drops clients A and C?
2. Which clients would you recommend that the company drop, if any? Provide a numerical financial analysis to explain your answer, and if you disagree with the company’s own proposal explain why.
3. Specialist employee (Jean Pierre A.) performs much of the work for Client C, and will leave the Circle Group Company to work privately for Client C if the Company drops Client
C. This in turn means that Circle Group Company will be unable to perform similar specialist engineering work for Client A, and will lose $25,000 in fees from client A. Jean Pierre’s monthly salary of $8,000 is classified as a Client C specific fixed cost. Advise Circle Group on whether the company should keep or drop Client C, and provide your supporting financial analysis.
Revenue
Variable costs
Client-specific fixed costs
Share in company-wide fixed costs
Operating profit (loss)
Client A
Client B
Client C
Total
92,000
106,000
47,000
245,000
75,100
63,000
37,600
175,700
15,909
26,428
12,363
54,700
8,091
12,672
5,137
25,900
(7,100)
3,900
(8,100)
( 11,300)
Explanation / Answer
Client A Client B Client C Total Revenue 92000 106000 47000 245000 Variable cost 75100 63000 37600 175700 client specific fixed cost 15909 26428 12363 54700 Share in company wide fixed costs 8091 12672 5137 25900 operating profit /(loss) -7100 3900 -8100 -11300 1) If client A& C are discontinued , then the operating profit is Client B Revenue 106000 Variable cost 63000 client specific fixed cost 26428 Share in company wide fixed costs 25900 operating profit /(loss) -9328 The operating profit will convert into a loss 2) Client A Client B Client C Total Revenue 92000 106000 47000 245000 Variable cost 75100 63000 37600 175700 client specific fixed cost 15909 26428 12363 54700 contribution 991 16572 -2963 14600 As the contribution after client specific fixed cost is negative , the company should discontinue Client C , the operating profi wiil be as under Client A Client B Total Revenue 92000 106000 198000 Variable cost 75100 63000 138100 client specific fixed cost 15909 26428 42337 contribution 991 16572 17563 Share in company wide fixed costs 12034.34 13865.66 25900 Net operating cost -11043.3 2706.343 -8337 As the operating loss reduces The company's proposal of closing Client A & C are not correct as the operating loss is higher when both the clients are closed 3) C) Client A Client B Total Revenue 67000 106000 173000 Variable cost 75100 63000 138100 client specific fixed cost 15909 26428 42337 contribution -24009 16572 -7437 Share in company wide fixed costs 10030.64 15869.36 25900 Net operating cost -34039.6 702.6358 -33337 By closing client C , there is a revenue loss of $ 25000 from Client A, which hits the bottom line and increases the loss substantially hence client C closure is not advisable
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.