Chapter 6 Measuring and Managing Customer + Test Bank Docx - Management Accounting Info 7e - Chapter Test Questions by Atkinson A. Atkinson. DOCX document preview.

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Chapter 6 Measuring and Managing Customer + Test Bank Docx

Chapter 6

Measuring and Managing

Customer Relationships

Learning Objectives―Coverage by question type

LO1 – Assign marketing, selling, distribution, and administrative costs to customers.

True / False Multiple Choice Exercises, Problems & Short Answer

1-4 1, 2 1, 3, 5, 13

LO2 – Measure customer profitability.

True / False Multiple Choice Exercises, Problems & Short Answer

5-8 3-5 6, 13

LO3 – Explain the differences between a low- and a high-cost-to-serve customer.

True / False Multiple Choice Exercises, Problems & Short Answer

9-13 6-9 2, 5, 6

LO4 – Calculate and interpret the “whale curve” of cumulative customer profitability.

True / False Multiple Choice Exercises, Problems & Short Answer

14 10-14 4, 7

LO5 – Explain why measuring customer profitability is especially important for service companies.

True / False Multiple Choice Exercises, Problems & Short Answer

15-17 15 2, 8

LO6 – Describe the multiple actions that a company can take to transform breakeven and loss customers into profitable ones.

True / False Multiple Choice Exercises, Problems & Short Answer

None 16-21 9

Continued

LO7 – Appreciate the value of the pricing waterfall to trace discounts and allowances to individual customers.

True / False Multiple Choice Exercises, Problems & Short Answer

18, 19 22-27 10, 11

LO8 – Align salespersons’ incentives to achieving customer profitability and loyalty.

True / False Multiple Choice Exercises, Problems & Short Answer

20-22 28, 29 12, 13

LO9 – Understand why calculating customer lifetime value is valuable to a business.

True / False Multiple Choice Exercises, Problems & Short Answer

23-25 30-32 14

LO10 – Explain why companies need nonfinancial measures of customer satisfaction and loyalty.

True / False Multiple Choice Exercises, Problems & Short Answer

26-28 33-35 15, 16

Chapter 6: Measuring and Managing Customer Relationships

True / False

LO1

Terms: MSDA expenses

Difficulty: 1

  1. Marketing, selling, distribution, and administrative expenses are dependent on the volume and mix of products that the company produces.

Difficulty: 1

  1. Many costs of marketing, selling, and distribution expenses are incurred not to support individual products or product lines, but rather to support customers, market segments or distribution channels.

Difficulty: 1

  1. Many companies quantify their customer relationships by using nonfinancial metrics on satisfaction and loyalty.

Difficulty: 1

  1. Many companies trace marketing, sales, distribution, and administration costs to customers to accurately measure customer profitability.

Difficulty: 1

  1. The 80/20 rules states that the top 20% of customers generate 80% of revenues.

Difficulty: 1

  1. The 40-1 rule demonstrates that the top customers generate revenues at a rate of 40-1 over all other customers.

Difficulty: 2

  1. Measuring customer profitability can be accomplished through an activity based costing study.

Difficulty: 2

  1. MSDA expenses as a percentage of sales is an effective way to measure customer profitability.

Difficulty: 1

  1. One option to transform breakeven or loss customers into profitable customers is to use more discipline in granting discounts and allowances.

Difficulty: 2

  1. Companies should avoid high cost-to-serve customers because they are unprofitable.

Difficulty: 1

  1. The pricing waterfall charts revenue leaks from list price caused by discounts and allowances used to gain customer loyalty.

Difficulty: 1

  1. Low cost-to-serve customers order in smaller quantities.

Difficulty: 1

  1. Customized delivery is a characteristic of a high cost-to-serve customer.

Difficulty: 2

  1. The whale curve shows that the middle 60% of customers generate the majority of total profits.

Difficulty: 1

  1. For service companies, in contrast, customer behavior determines the quantity of demands for organizational resources that produce and deliver the service to customers.

Difficulty: 2

  1. In a service company, marketing and selling costs are customer independent.

Difficulty: 1

  1. A bank customer with a high checking account balance and few transactions is a high cost-to-serve customer.

Difficulty: 1

  1. Discounts given to encourage large purchases are known as sales discounts.

Difficulty: 1

  1. Activity based costing can be used to trace revenue deductions such as discounts to individual orders and customers.

Difficulty: 1

  1. Companies base salespeople's compensation on net income because it is simple to measure.

Difficulty: 1

  1. Companies can use time-driven ABC costing systems to create customer-specific profit and loss statements.

Difficulty: 2

  1. Salespersons' incentives that set minimum quotas and commissions based on sales revenue, and tie bonuses and rewards to achieving sales revenues above a stretch target contribute to unprofitable customer relationships.

Difficulty: 1

  1. Duration of the relationship is a critical parameter for calculating customer lifetime value.

Difficulty: 2

  1. Additional costs to serve and retain the customer in year t is represented in the customer lifetime value equation as ct.

Difficulty: 2

  1. Customer lifetime value is the discounted net cash flows from the customer for all of the years that it remains a customer compared to the initial acquisition cost to obtain the lifetime relationship with the customer.

Difficulty: 1

  1. Companies generally use two approaches to customer satisfaction surveys: telephone interviews and personal interviews.

Difficulty: 1

  1. Customer loyalty is characterized by a customer's attitude toward a product or company.

Difficulty: 1

  1. Customer loyalty may be low regardless of the customer's attitude toward the product or the company in highly competitive industries, characterized by low differentiation among products, with many substitutes and a low cost of switching.

Difficulty: 1

  1. Marketing, selling, distribution, and administrative expenses:

A) can be traced through causal relationships to products.

B) are independent of volume and product mix.

C) are usually incurred through a single distribution channel.

D) do not work well with activity based costing.

Difficulty: 1

  1. Customer financial performance:

A) are best measured with financial metrics.

B) are reflected on the balanced scorecard as part of the learning and growth perspective.

C) can be improved by offering special features, and highly responsive customer service.

D) is improved by focusing on a combination of financial and nonfinancial metrics.

Difficulty: 1

  1. Which of the following does the text suggest should not be considered as cost to serve a customer?
  2. Travel to customers to provide customer support
  3. Ship to customers
  4. Opportunity cost of interest on credit granted to customers
  5. All the above are legitimate costs to serve customers

Difficulty: 1

  1. What is an important role of a pricing waterfall?
  2. To provide a strict guideline that all employees should follow when pricing a product
  3. To suggest the need to improve profitability
  4. To provide guidance when classifying customer related costs
  5. To ensure that customers are treated fairly

Chapter 6

Difficulty: 2

  1. Customer profitability:

A) is reflected by gross margin.

B) are most accurately measured using traditional costing.

C) are most accurately measured using activity based costing.

D) are most accurately measured using a combination of traditional costing and activity based costing.

Difficulty: 1

  1. High cost to serve customers:

A) have high order quantities.

B) have large amounts of post-sales support.

C) order standard products.

D) have little to no pre-sales support.

Difficulty: 1

  1. Low cost to serve customers:

A) have low order quantities.

B) have large amounts of post-sales support.

C) order standard products.

D) have customized delivery.

Difficulty: 2

  1. Shannon Company has 30 order operators with associated costs of $1,000,000 per year. Shannon calculated that each operator worked about 2,000 hours per year. Allowing for time off, each operator provided about 1,600 or productive work per year.

What is the rate per hour for each order entry employee?

A) $20.83

B) $28.83

C) $500.00

D) $625.00

Difficulty: 2

  1. The rate per hour of each order entry employee is $56.00 per hour. On average, it takes an order entry employee about 0.1 hour to enter the basic customer information for a manual customer order. In addition, manual orders require an operator to spend an additional 0.02 hour to enter each line item on the order.

What is the order entry cost associated with a manual order with 10 line items?

A) $0.30

B) $5.60

C) $11.20

D) $16.80

Difficulty: 1

  1. Aggressive customers who demand low prices and customized services:

A) require high costs to serve.

B) are most profitable to serve.

C) are customers to eliminate.

D) require high costs and are most profitable to serve.

Difficulty: 2

  1. The 80/20 rule:

A) finds that 80% of revenues are generated by the top 20% of the customers.

B) finds that 80% of profits are generated by the top 20% of the customers.

C) can be graphed as the whale curve.

D) finds that 80% of costs are generated by 20% of the customers.

Difficulty: 1

  1. The whale curve:

A) graphs sales verses customers.

B) graphs profits verses customers.

C) graphs the 80/20 rule.

D) finds that 80% of costs are generated by 20% of the customers.

Difficulty: 2

  1. The whale curve shows:

A) the most profitable 20% of customers generate about 180% of sales.

B) the most profitable 20% of customers generate about 80% of total sales.

C) the most profitable 20% of customers generate about 80% of total profits.

D) the most profitable 20% of customers generate about 180% of total profits.

Difficulty: 3

  1. Which of the following statements is true about the whale curve?
  2. It can be used to identify what actions should be taken to make a specific customer more profitable
  3. It can be used to suggest new product opportunities
  4. It can be used to identify the proportion of customers that are profitable
  5. A whale curve cannot be used for any of the above

Difficulty: 1

  1. Service companies:

A) focus more on customer costs and profitability than manufacturing companies.

B) are less customer driven than manufacturing companies.

C) have less variation in demand for organizational resources.

D) None of the above

Difficulty: 1

  1. Which of the following is not an option to transform breakeven or loss customers into profitable ones?

A) Improve the process used to produce, sell, deliver and service the customer.

B) Use less menu-based pricing that allows customers to select features and services it wishes to pay for.

C) Improve margins by lowering costs.

D) Use more discipline in granting discounts and allowances.

Difficulty: 1

  1. Examining internal operations to see where the company can improve processes to lower costs of serving customers is an example of:

A) process improvements.

B) activity based pricing.

C) managing relationships.

D) the pricing waterfall.

Difficulty: 1

  1. Establishing a base price for producing and delivering a standard quantity of each standard product is an example of:

A) process improvements.

B) activity based pricing.

C) managing relationships.

D) the pricing waterfall.

Difficulty: 1

  1. What is the primary role for activity-based pricing?
  2. To determine a base price of a product
  3. To determine the price of a product
  4. To determine the price of an activity
  5. To ensure that every product is priced so it is profitable

Difficulty: 1

  1. Persuading customers to use a greater score of the company's products and services is an example of:

A) process improvements.

B) activity based pricing.

C) managing relationships.

D) the pricing waterfall.

Difficulty: 3

  1. On a scale from one to ten, Frog Company labels customers who gave the company a score of 9 or 10 as promoters, customers who have the company a score of 7 or 8 as passively satisfied, and customers who gave the company a score of 6 or less as detractors. Frog Company asked 1,000 customers to give the company a score. Six hundred customers indicated, by the score they assigned, that they were passively satisfied.

If the achieved net promoter score was 25% what is the number of promoters and detractors in this survey?

  1. 400 promoters and 100 detractors
  2. 325 promoters and 75 detractors x/1000 + (1000-600-x)/1000 = .25: x =375
  3. 250 promoters and 150 detractors
  4. None of the above

Difficulty: 1

  1. The pricing waterfall:

A) charts the multiple sources of revenue by customer.

B) charts multiple list prices offered to different customers.

C) charts the multiple revenue leaks from list price caused by allowances and discounts.

D) charts multiple types of customer costs.

Difficulty: 1

  1. Which of the following is not part of the pricing waterfall chart?

A) dealer list price

B) customer discount price

C) invoice price

D) actual net price

Difficulty: 1

  1. Which of the following does your text describe as a component of the pricing waterfall?
  2. List price
  3. Invoice price
  4. Actual net price
  5. All the above

Difficulty: 1

  1. Customers that require a low price and lots of customized service are:

A) high cost to serve and low margin.

B) low cost to serve and low margin.

C) high cost to serve and high margin.

D) low cost to serve and high margin.

Difficulty: 1

  1. Customers are price sensitive with few special demands are:

A) high cost to serve and low margin.

B) low cost to serve and low margin.

C) high cost to serve and high margin.

D) low cost to serve and high margin.

Difficulty: 1

  1. Typical sales person's compensation:

A) is paid in the form of salary.

B) encourages sales only to profitable customers.

C) is usually based on customer profit.

D) is usually based on sales revenue.

Meadow

Forest

Sales

$900,000

$800,000

Cost of Goods Sold

360,000

160,000

MSDA expenses excluding sales commissions

640,000

130,000

Difficulty: 3

  1. If the company pays a 2% sales commission based on revenue, this will encourage a salesperson’s efforts to sell to:

A) Meadow, an unprofitable customer.

B) Meadow, a profitable customer.

C) Forest, an unprofitable customer.

D) Forest, a profitable customer.

Meadow

Forest

Cost to Company

Sales

$900,000

$800,000

Commissions on sales revenue

2%

2%

Total commissions on revenue

$18,000

$16,000

$34,000

Operating Profit

$−100,000

$510,000

Commission on profit

4%

4%

Total commissions on profit

$0

$20,400

$20,400

Difficulty: 3

  1. If the company pays a 4% sales commission based on customer profit, this will encourage a salesperson’s efforts to sell to:

A) Meadow, an unprofitable customer.

B) Meadow, a profitable customer.

C) Forest, an unprofitable customer.

D) Forest, a profitable customer.

Meadow

Forest

Cost to Company

Sales

$900,000

$800,000

Commissions on sales revenue

2%

2%

Total commissions on revenue

$18,000

$16,000

$34,000

Operating Profit

$−100,000

$510,000

Commission on profit

4%

4%

Total commissions on profit

$0

$20,400

$20,400

Difficulty: 3

  1. What is the customer lifetime value of customer Addison Barnes for the first three years of the customer relationship?

Initial acquisition cost

$700

n = number of years retained

3

r = retention rate for each of the n years retained

0.8

Cost of capital

0.1

M1 Margin from customer in year 1

$500

M2 Margin from customer in year 2

$600

M3 Margin from customer in year 3

$650

c1 cost

$120

c2 cost

$100

c3 cost

$100

A) $2,080.00

B) $940.49

C) $1,380.00

D) $240.49

Difficulty: 3

  1. What is the customer lifetime value of customer Blair Brooks for the first three years of the customer relationship?

Initial acquisition cost

$2,100

n = number of years retained

3

r = retention rate for each of the n years retained

0.8

Cost of capital

0.1

M1 Margin from customer in year 1

$1,500

M2 Margin from customer in year 2

$1,800

M3 Margin from customer in year 3

$1,950

c1 cost

$360

c2 cost

$300

c3 cost

$300

A) $825.12

B) $2,925.12

C) $6,390.00

D) $4,190.00

Difficulty: 2

  1. Which of the following is not a critical parameter for calculating customer lifetime value?

A) initial acquisition cost

B) revenues

C) profits or losses

D) the duration of the relationship

Difficulty: 2

  1. Repeated or increased purchases of the product or service is known as?

A) profitability

B) customer satisfaction

C) customer loyalty

D) the net promoter score

Difficulty: 2

  1. ____________ uses measurements of customer attitudes toward the product or service.

A) Profitability

B) Customer satisfaction

C) Customer loyalty

D) The net promoter score

Difficulty:

  1. Based on the following company data, what is the net promoter score?

Score

Number of Responses

10

1,282

9

2,530

8

2,508

7

456

6

1,096

5

986

4

714

3

126

2

84

1

218

10,000

A) 2.18%

B) 38.12%

C) 12.82%

D) 5.88%

Score

Number of Responses

Percentage of Total

10

1,282

12.82%

9

2,530

25.30%

8

2,508

25.08%

7

456

4.56%

6

1,096

10.96%

5

986

9.86%

4

714

7.14%

3

126

1.26%

2

84

0.84%

1

218

2.18%

10,000

Difficulty: 3

  1. Conner Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue. The new CFO has discovered that Conner's customers differ greatly in their ordering patterns and interaction with Conner's sales force. The CFO believes Conner's cost system does not accurately assign MSDA expenses to customers, and therefore developed an ABC system and gathered the following information:

Gamma

Kappa

Sales

$860,000

$700,000

Cost of Goods Sold

440,000

310,000

Sales representative travel 1

8,000

84,000

Service customers

30,000

220,000

Handle customer orders

2,000

24,000

Ship to customers

48,000

144,000

Required:

a. Using the current cost system's approach of assigning MSDA expenses to customers using a rate of 33% of sales revenue, determine the operating profit associated with Austin and with Brooke.

b. Using the activity-based costing information provided, determine the operating profit associated with Gamma and with Kappa.

c. Which of the two methods produces more accurate assignments of MSDA expenses to customers? Explain.

Gamma

Kappa

Sales

$860,000

$700,000

Cost of goods sold

$440,000

$310,000

Gross margin

$420,000

$390,000

Marketing, selling, distribution, and administrative expenses: 33% × sales

$283,800

$231,000

Operating profit

$136,200

$159,000

Operating profit/Sales

15.84%

22.71%

Gamma

Kappa

Sales

$860,000

$700,000

Cost of goods sold

$440,000

$310,000

Gross margin

$420,000

$390,000

Marketing, selling, distribution, and administrative expenses:

Sales representative travel

$ 18,000

$ 84,000

Service customers

30,000

220,000

Handle customer orders

2,000

24,000

Ship to customers

48,000

144,000

Total activity expenses

$98,000

$472,000

Operating profit

$322,000

–$ 82,000

Operating profit/Sales

37.44%

–11.71%

Difficulty: 3

  1. The Carnival Company is noted for an exceptionally impressive line of carnival masks. The company has established the following selling and distribution overhead activity cost pools and their corresponding activity drivers for the year 2021:

Activity

Cost

Cost Driver

Marketing

$60,000

$1,000,000 of sales

Customer service

$20,000

5,000 customers

Order execution

$10,000

100 orders

Warehousing

$10,000

50 product lines

Required:

a. Determine the activity cost driver rate for each of the four selling and distribution activities.

b. Under what circumstances would it be appropriate to use each of the activity cost drivers to determine the cost of the carnival masks?

c. Describe at least one possible negative behavioral consequence for each of the four activity cost drivers.

Difficulty: 2

  1. Discuss the issues related to excessive focus on nonfinancial customer metrics such as customer loyalty and satisfaction.

Difficulty: 2

  1. Describe the characteristics of high cost-to-serve customers and low cost-to-serve customers.

High Cost-to-Serve Customers

Low Cost-to-Serve Customers

  • Order custom products
  • Order standard products
  • Small order quantities
  • Large order quantities
  • Customized delivery
  • Standard delivery
  • Manual processing; high order error rates
  • Electronic processing (EDI) with zero defects
  • Large amounts of pre-sales support (marketing, technical, and sales resources)
  • Little to no pre-sales support (standard pricing and ordering)
  • Large amounts of post-sales support (installation, training, warranty, field service)
  • No post-sales support
  • Pay slowly (have high accounts receivable from customer)
  • Pay on time (low accounts receivable)

Difficulty: 2

  1. Tinker Company has 40 order operators with associated costs of $2,000,000 per year. Tinker calculated that each operator worked about 2,000 hours per year. Allowing for time off, each operator provided about 1,600 or productive work per year. On average, it takes an order entry employee about 0.2 hour to enter the basic customer information for a manual customer order. In addition, manual orders require an operator to spend an additional 0.04 hour to enter each line item on the order.

Required:

a. What is the rate per hour for each order entry employee?

b. What is the order entry cost associated with a manual order with 10 line items?

Difficulty: 2

  1. Discuss the 80-20 rule and the 40-1 rule.

Difficulty: 3

  1. Compare the 80-20 rule and the whale curve as it relates to customer profitability.

Difficulty: 2

  1. How do customer costs differ in service companies when compared to manufacturing companies? Discuss customer independent and customer specific costs.

Difficulty: 2

  1. What are the four options that manufacturing and service companies have to transform breakeven or loss customers into profitable ones?

Difficulty: 3

  1. Riley Company has the following operating profit:

Sales

$400,000

Variable Costs

160,000

Contribution Margin

$240,000

Fixed Costs

140,000

Operating Profit

$100,000

Required:

a. Riley could increase revenues by 10% by reducing sales discounts by 10%. There will be no changes in variable or fixed costs. What would be the percentage increase in operating profits?

b. Refer to the original information in this problem. Suppose Riley's sales people discounted sales another 2% with no change in variable or fixed costs. What is the change in operating profits?

Initial

With 10% Revenue Increase

Net sales revenues

$400,000

$440,000

Variable costs

160,000

160,000

Contribution margin

240,000

280,000

Fixed costs

140,000

140,000

Operating profit

$100,000

$140,000

% change in operating profit

40%

Initial

With 2% Additional Discount

Net sales revenues

$400,000

$392,000

Variable costs

160,000

160,000

Contribution margin

240,000

232,000

Fixed costs

140,000

140,000

Operating profit

$100,000

$92,000

% change in operating profit

8%

Difficulty: 1

  1. Describe the pricing waterfall.

Difficulty: 3

  1. Compare and contrast a typical salesperson's revenue based compensation plan to a compensation plan based on customer profits.

Difficulty: 3

  1. Tanaka Company's CFO provided the following information on last year's sales for two customers that purchased a variety of products from the company.

Toshi

Kanda

Sales

$900,000

$800,000

Cost of Goods Sold

360,000

160,000

MSDA expenses, excluding sale commissions

640,000

130,000

Required:

a. Which customer is more profitable for the company?

b. Compare a sales incentive scheme that pays 3% of sales revenue to an incentive scheme that pays 5% of customer profit. How will each scheme affect salespersons' desire to increase sales to each customer?

Toshi

Kanda

Sales

$ 900,000

$800,000

Cost of Goods Sold

360,000

160,000

Gross margin

540,000

640,000

MSDA expenses

640,000

130,000

Operating profit

$−100,000

$510,000

Toshi

Kanda

Cost to Company

Sales

$ 900,000

$800,000

Commission on sales revenue

3%

3%

Total commissions on revenue

$27,000

$24,000

$51,000

Operating profit

$−100,000

$510,000

Commission on profit

5%

5%

Total commissions on profit

$0

$25,500

$25,500

Difficulty: 3

  1. Compute the customer lifetime value of Customer 725 based on the data below for the first six years of the customer relationship. Costs (ct) were incurred to promote customer retention at a rate of 0.8 in years 1 through 6.

Initial acquisition cost

$2,400

n = number of years retained

6

r = retention rate

0.8

Cost of capital

0.1

Mt = margin from customer in year t

M1

$1,000

M2

1,200

M3

1,300

M4

1,400

M5

1,500

M6

1,600

c1

240

c2

200

c3

200

c4

200

c5

160

c6

160

Difficulty: 3

  1. Based on the following company data, what is the net promoter score?

Score

Number of Responses

10

2,564

9

5,060

8

5,016

7

912

6

2,192

5

1,972

4

1,428

3

252

2

168

1

436

20,000

Score

Number of Responses

Percentage of Total

10

2,564

12.82%

9

5,060

25.30%

8

5,016

25.08%

7

912

4.56%

6

2,192

10.96%

5

1,972

9.86%

4

1,428

7.14%

3

252

1.26%

2

168

0.84%

1

438

2.18%

20,000

Difficulty: 2

  1. Describe five reasons that loyal customers are valuable.

Document Information

Document Type:
DOCX
Chapter Number:
6
Created Date:
Aug 21, 2025
Chapter Name:
Chapter 6 Measuring and Managing Customer Relationships
Author:
Atkinson A. Atkinson

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