Johnson Beverage, Inc

7 Pages Posted: 10 Jun 2009

See all articles by Luann J. Lynch

Luann J. Lynch

University of Virginia - Darden School of Business

Abstract

Jack Johnson, owner of Johnson Beverage, has just received notice that one of his largest and most loyal customers may want to negotiate a lower price for its product purchases. Information compiled by Johnson's accountant, where customer service costs are allocated to customers as a percentage of revenue, suggests that profit margin on the customer is too low to withstand a price decrease. Students are asked to design an activity-based system for allocating customer service costs and to use it to estimate customer profitability for several customers. The revised costs reflect that the customer places low demands on customer service resources and is sufficiently profitable to permit Johnson Beverage to negotiate on price to preserve the business. Additional analysis identifies some unprofitable customers, previously thought to be profitable, that offer opportunities for strategic decisions that lead to profit improvement.

Excerpt

UVA-C-2292

Rev. June 17, 2009

JOHNSON BEVERAGE, INC.

As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor's sales manager talking with the general manager of Saver Superstore, one of JBI's largest customers. Then, that morning, Johnson's sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make some noises about wanting to negotiate a lower price. This could cause a dilemma because this customer had been one of the company's largest and most loyal customers for years.

Johnson leaned back in his chair. These things always seemed to come up on Friday—just in time to monopolize his thoughts over what otherwise would have been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and several others for later that afternoon.

Company Background

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Keywords: activity-based costing, customer profitability, cost allocation, cost analysis

Suggested Citation

Lynch, Luann J., Johnson Beverage, Inc. Darden Case No. UVA-C-2292, Available at SSRN: https://ssrn.com/abstract=1417164

Luann J. Lynch (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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