Montreal Electric Suppliy

The main issue with Montreal Electric Supply is the fact that overall profitability has been decreasing over the years even though the sales are increasing. Their Customer Profitability system lacks the ability to properly discern the actual contribution/loss of their customers.

A. According to the results of initial customer profitability system, Alanson has net income of only 3.11% of the total sales, and a gross profit margin of 30% which is similar to small automobile client: Conway. Whereas, Boyne a small non automotive client has a slightly higher net profit and the gross profit margin: 3.7% and 30.5% respectively. Therefore, Boyne is most profitable compared to Alanson and Conway. Hence, based on the initial customer profitability system, Montreal Electric Supply should try to increase more non automotive sales and cut down small automotive sales which are least profitable. Although, large automotive has the same profitability ratios it makes up a major portion of company’s revenues due to which it should focus mainly on cost reduction and pricing.

B. Despite the implementation of customer profitability system, company profit still dropped. The main reason is the assumption the company used in this initial system. MES charge the user fee based on an overall service rate, without distinguishing various types of customer which is contrary to their operations and their order handling process. For example, large automobile clients require a lot more rush order services, which cost significantly higher than regular order. Where in this system, all customers are being charged 11.75% of COGS for W&S cost and 18.67% sales for G&A cost, regardless the type of service provided to them.

C. The Customer profitability measures provided by the initial system have a negative impact, because it provides limited information with regard to individual customers. Since the two departments (G&A and W&S) costs are respectively allocated based on the amount of sales and...