Marches Group LLP currently provides consulting services to three clients (A, B,
ID: 2483292 • Letter: M
Question
Marches Group LLP currently provides consulting services to three clients (A, B, and C). It is in the process of evaluating the profitability of each client with a view to possibly dropping one or more of the clients. A detailed analysis of each clients account for the most recent month follows: Variable costs for each client form a constant percentage of the client's fee. Fixed costs consist of both company-wide and client-specific fixed costs. Company-wide fixed costs have been allocated across clients in proportion to the sales fee collected from each client. Client-specific fixed costs could be avoided if the respective client is lost. Based on this information Marches is planning to drop clients A and C. Predict the new level of operating profit if the company drops clients A and C? Which clients would you recommend that the company drop, if any? Provide a numerical financial analysis to explain your answer, and if you disagree with the company's own proposal explain why. Specialist employee (Jean Pierre A.) performs much of the work for Client C, and will leave the Marches Company to work privately for Client C if the Company drops Client C. This in turn means that Marches Company will be unable to perform similar specialist engineering work for Client A, and will lose $25,000 in fees from client A. Jean Pierre's monthly salary of $8,000 is classified as a Client C specific fixed cost. Advice Marches on whether the company should keep or drop Client C, and provide your supporting financial analysis.Explanation / Answer
(a) Predit the new operating profit - if client A and C are dropped. Client A Client B Client C Total Revenue $1,06,000 $1,06,000 Variable costs $63,000 $63,000 Contribution Margin $43,000 $43,000 Client speciifed fixed costs $26,428 $26,428 Client speciifed Margin $0 $16,572 $0 $16,572 Share in company-wide fixed costs $8,091 $12,672 $5,137 $25,900 Operaing Income (loss) -$8,091 $3,900 -$5,137 -$9,328 (b) Which client should be dropped. Client A Client B Client C Total Revenue $92,000 $1,06,000 $47,000 $2,45,000 Variable costs $75,100 $63,000 $37,600 $1,75,700 Contribution Margin $16,900 $43,000 $9,400 $69,300 Client speciifed fixed costs $15,909 $26,428 $12,363 $54,700 Client speciifed Margin $991 $16,572 -$2,963 $14,600 Share in company-wide fixed costs $8,091 $12,672 $5,137 $25,900 Operaing Income (loss) -$7,100 $3,900 -$8,100 -$11,300 Since the client specified margin of Client C is negative, this client can be dropped. Variable costs and Client specified costs for this client will be avoided, if the client is dropped. Client A and B has positive client specified margin, so they should be continued. © effect of leaving specialist employee Specialist employee, is needed for client A, and the decrease in fee will decrease the client specified margin. This will decrease the company total profit also. Therefore client C should not be dropped, but should be asked to increase the fee, so that the total profit of the company can be increased.