Complete 3 page APA formatted essay: Case study.The many hidden costs resulted in a negative earnings after tax which is a loss. Therefore the company needs to shift to activity costing system to be a

Complete 3 page APA formatted essay: Case study.

The many hidden costs resulted in a negative earnings after tax which is a loss. Therefore the company needs to shift to activity costing system to be able to account for all its expenses.

Both customers have the potential of being profitable to the firm. However, the associated cost of carrying the account receivable balance for customer B reduces the profitability of this customer. The carrying cost for account receivable for customer B is $3000. Therefore the profitability of the two customers cannot be the same as customer A has a higher profitability to customer B. the extra activity per carton for customer B also reduces his profitability. Hidden costs for customer B account for the reduced profitability of this customer so that despite the two customers having same annual revenue generation for the company. Increased cost associated with customer B is responsible for the difference in the profit generated by the two customers. customer A profitability being $ 10208 while customer B has a profitability of $ 7034.

The limitation of the profitability of the two customers is in the order size of the two customers. If customer A make small orders, its profitability may reduce due to higher operational cost associated with low production. The customer may also consider changing their sourcing when they discover a cheaper source thus the company loses on the customer. For customer B, their profitability is lower but sure due to the good working relation developed. Therefore, the company can count on this particular customer in all seasons due to the relationship developed through credit sales to the customer. Chances of the customer relocating to another supplier are very low thus the customer is more reliable in the long term.

Through applying the activity based costing for all customers, the company is able to identify the profitable customers and the customers causing losses. The profitability of