Keep Drop Customers - New Project 5

The decision to add or drop a customer is a crucial one for businesses, as it can significantly impact profitability. This decision is often based on the customer's profitability, which can be determined using differential analysis. Differential analysis is a method used to compare the costs and revenues of different alternatives to make a decision.

When deciding whether to keep or drop a customer, it's essential to identify the relevant costs. Relevant costs are those that will change if the customer is dropped. These costs include variable costs and direct fixed costs that are directly related to the customer. Allocated fixed costs, on the other hand, are not relevant, as they will continue regardless of the decision.

The differential analysis format for customer decisions is similar to that used for product line decisions. However, instead of tracking information by product line, it's tracked by customer. The analysis involves comparing the revenues, variable costs, and fixed costs of keeping the customer to those of dropping the customer.

Activity-based costing (ABC) can provide more accurate cost information for customer profitability analysis. ABC assigns costs to activities and then to customers based on their use of those activities. This approach can help identify the costs associated with serving a particular customer, such as costs to acquire, provide goods and services, serve, and retain customers.

When making the decision to add or drop a customer, businesses should consider not only financial factors but also non-financial factors, such as the impact on employees and the company's values. The decision should be based on a thorough analysis of the relevant costs and revenues.

Conclusion: The decision to add or drop a customer is a complex one that requires careful analysis of relevant costs and revenues. By using differential analysis and activity-based costing, businesses can make informed decisions that align with their goals and values.