Colise Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair

The following profitability data apply to five customers:

Customer Revenues Customer Costs
Marveline Burnett $360 $270
J Jackson 240 366
Roger Jones 96 90
Paul Saas 90 132
Becky Stephan 420 264

Required:
a. Compute the operating income for each of the five customers.
b. What options should Colise Services consider in light of the customer-profitability results?
c. What problems might Colise Services encounter in accurately estimating the operating costs of each customer?

Answer:
a. Customer Revenues Customer Costs Operating income
Marveline Burnett $360 $270 $ 90
J Jackson 240 366 (126)
Roger Jones 96 90 6
Paul Saas 90 132 (42)
Becky Stephan 420 264 156

b. 1. Pay increased attention to the profitable customers Stephan and Burnett.
2. Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behavior reduces overall costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, etc. Determine whether the operating income pattern will probably continue or not and why.
3. As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is expected to continue.

c. Problems in accurately estimating operating costs of each customer include:
1. The basic underlying records may not be accurate.
2. Some repair personnel may be efficient and more experienced, others may be less experienced and slower, and still others may "chit-chat" more with the clients than others.
3. Costs that are allocated to more than one customer may be distorting operating income.