SkinTan’s top five customers generate sales revenue of £950,000 per annum. Each generates a different gross margin as a consequence of price negotiations that have been carried out over several years

SkinTan’s top five customers generate sales revenue of £950,000 per annum. Each generates a different gross margin as a consequence of price negotiations that have been carried out over several years

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Q18-3: SkinTan’s top five customers generate sales revenue of £950,000 per annum. Each generates a different gross margin as a consequence of price negotiations that have been carried out over several years. Because of their location, each customer incurs different distribution expenses. Sales commissions are paid at the rate of 6% on all sales. Fixed costs are customer specific, covering salaries of sales and office staff who service each customer. The following table shows the information for each of the top customers for the previous year.

Sales                                      250,000        250,000  200,000  150,000  100,000

Gross margin %                 30%                25%          21%           37%        39%

Distribution expenses   30,000           14,000     25,000     12,000    6,000

Fixed costs                        30,000           25,000     16,000     15,000    10,000

Carry out a customer profitability analysis and make recommendations in relation to any future strategies SkinTan should take in relation to its top customers.

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