Problem 3 Please show work/explanation. Problem 3: Decision Making (5 points Gar
ID: 2500677 • Letter: P
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Problem 3
Please show work/explanation.
Problem 3: Decision Making (5 points Garches Group LLP currently provides consulting services to three clients (X, Y, and Z). 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 X 82,000 45,100 15,909 Client Y 96,000 62,400 26,528 10,472 Client Z 47,000 37,600 12,363 5,137 (8,100) Total 225,000 145,100 54,800 23,700 1,400 8,091 12,900 (3,400 ( 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 (A) Based on this information Garches is planning to drop clients Y and Z. Predict the new level of operating profit if the company drops clients Y and Z?Explanation / Answer
(A)
Calculation of new Level of operating profit:
(After Dropping Client Y and Z)
Revenue
$ 82,000
Less: Variable Costs
$ (45,100)
Less: Client Specific fixed costs
$ (15,909)
Less: Company wide Fixed costs
$ (23,700)
Operating profit (loss)
$ (2,709)
(B)
Dropping decision:
Client X
Client Y
Client Z
Revenue
$ 82,000
$ 96,000
$ 47,000
Less: Variable Costs
$ (45,100)
$ (62,400)
$ (37,600)
Less: Client Specific fixed costs
$ (15,909)
$ (26,528)
$ (12,363)
Client profit (loss)
$ 20,991
$ 7,072
$ (2,963)
Client profit for Z is negative, hence Company should drop Client Z only.
Company's proposal to drop client Y and Z both is not suitable because Client Y has positive profits.
(C)
Decision:
IF Client Z is Dropped
IF Client Z is Not Dropped
Revenue
$ 171,500
$ 225,000
(82000+96000)-6500
Less: Variable Costs
$ (107,500)
$ (145,100)
(45100+62400)
Less: Client Specific fixed costs
$ (34,937)
$ (54,800)
(15909+26528-7500)
Less: Company wide Fixed costs
$ (23,700)
$ (23,700)
Operating profit (loss)
$ 5,363
$ 1,400
Company should drop Client Z as it would result in increased Operating profits
(A)
Calculation of new Level of operating profit:
(After Dropping Client Y and Z)
Revenue
$ 82,000
Less: Variable Costs
$ (45,100)
Less: Client Specific fixed costs
$ (15,909)
Less: Company wide Fixed costs
$ (23,700)
Operating profit (loss)
$ (2,709)
(B)
Dropping decision:
Client X
Client Y
Client Z
Revenue
$ 82,000
$ 96,000
$ 47,000
Less: Variable Costs
$ (45,100)
$ (62,400)
$ (37,600)
Less: Client Specific fixed costs
$ (15,909)
$ (26,528)
$ (12,363)
Client profit (loss)
$ 20,991
$ 7,072
$ (2,963)
Client profit for Z is negative, hence Company should drop Client Z only.
Company's proposal to drop client Y and Z both is not suitable because Client Y has positive profits.
(C)
Decision:
IF Client Z is Dropped
IF Client Z is Not Dropped
Revenue
$ 171,500
$ 225,000
(82000+96000)-6500
Less: Variable Costs
$ (107,500)
$ (145,100)
(45100+62400)
Less: Client Specific fixed costs
$ (34,937)
$ (54,800)
(15909+26528-7500)
Less: Company wide Fixed costs
$ (23,700)
$ (23,700)
Operating profit (loss)
$ 5,363
$ 1,400
Company should drop Client Z as it would result in increased Operating profits
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