Garches Group LLP currently provides consulting services to three clients (X, Y,
ID: 2755963 • Letter: G
Question
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
Client Y
Client Z
Total
82,000
96,000
47,000
225,000
45,100
62,400
37,600
145,100
15,909
26,528
12,363
54,800
8,091
10,472
5,137
23,700
12,900
(3,400)
(8,100)
1,400
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?
B) 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.
C) SpecialistmuchoftheworkforClient,andwillleaveClaytonCompanytoworkprivatelyforClientifClaytonCo.dropsClient Z. This in turn means that Garches will be unable to perform similar specialist engineering work for Client X, and will lose $6,500 in fees from client X. Francois’ monthly salary of $7,500 is classified as a Client Z specific fixed cost. Advise Garches on whether the company should keep or drop Client Z, and provide your supporting financial analysis.
Revenue
Variable costs
Client-specific fixed costs
Share in company-wide fixed costs
Operating profit (loss)
Client X
Client Y
Client Z
Total
82,000
96,000
47,000
225,000
45,100
62,400
37,600
145,100
15,909
26,528
12,363
54,800
8,091
10,472
5,137
23,700
12,900
(3,400)
(8,100)
1,400
Explanation / Answer
Details Client X Client Y Client Z Total Revenue 82,000 96,000 47,000 225,000 Variable costs 45,100 62,400 37,600 145,100 % Variable cost 55.0% 65.0% 80.0% 64.5% Contribution Margin 36,900 33,600 9,400 79,900 Contribution margin % 45.00% 35.00% 20.00% 35.51% Client Specific Fixed cost 15,909 26,528 12,363 54,800 Client Specific Income/(Loss) 20,991 7,072 (2,963) 25,100 Share of company wide fixed costs 8,091 10,472 5,137 23,700 Opearting Profit/(Loss) 12,900 (3,400) (8,100) 1,400 A If the compny drops Y & Z Details Client X Revenue 82,000 Variable costs 45,100 % Variable cost 55.0% Contribution Margin 36,900 Contribution margin % 45.00% Client Specific Fixed cost 15,909 Client Specific Income/(Loss) 20,991 Share of company wide fixed costs 23,700 Opearting Profit/(Loss) (2,709) B I would recommend for dropping Z only and keep X & Y that will give higher profitability Details Client X Client Y Total Revenue 82,000 96,000 178,000 Variable costs 45,100 62,400 107,500 % Variable cost 55.0% 65.0% 60.4% Contribution Margin 36,900 33,600 70,500 Contribution margin % 45.00% 35.00% 39.61% Client Specific Fixed cost 15,909 26,528 42,437 Client Specific Income/(Loss) 20,991 7,072 28,063 Share of company wide fixed costs 10,918 12,782 23,700 Opearting Profit/(Loss) 10,073 (5,710) 4,363 As dropping Y & Z will result is net opearting loss of $2,709 and dropping only Z inproves the Opearting profit to $4,363 , it is better to drop only Z C If Z is dropped , and Francois leaves , the situation will be ; I would recommend for dropping Z only and keep X & Y that will give higher profitability Details Client X Client Y Total Revenue 75,500 96,000 171,500 Variable costs 41,525 62,400 103,925 % Variable cost 55.0% 65.0% 60.6% Contribution Margin 33,975 33,600 67,575 Contribution margin % 45.00% 35.00% 39.40% Client Specific Fixed cost 15,909 26,528 42,437 Client Specific Income/(Loss) 18,066 7,072 25,138 Share of company wide fixed costs 10,434 13,266 23,700 Opearting Profit/(Loss) 7,632 (6,194) 1,438 So if Z is dropped and Francois leaves , still the opearting profit will be more than keeping Z So better to drop client Z
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.