Activity-Based Costing and the Evaluation of Customer Profitability: A Case Study

• In Event: Teaching, Learning and Curriculum

Abstract

This case examines the use of activity-based costing and other accounting tools to assess the profitability of individual customers of Carolina Creations (CC), a small furniture manufacturing business. The company was expanding, new customers were attracted, and sales were increasing. However, profitability was declining. The company’s founder, Richard Bachon, was concerned that the company was acquiring too many customers too fast, without regard to whether the customers were profitable to Carolina Creations. Bachon ordered his directors of accounting and marketing to devise methods for evaluating the profitability of individual customers. He hoped that greater insight could lead to improved pricing methods and practices for managing customers. Students are provided basic information on the activities related to serving customers and are required to develop tools to help management better understand the costs of serving customers.

Author

• David M Bukovinsky, Wright State University