Enhancing Profitability Through Service-Based Costing

It seems that customers such as A are more profitable for Allied at the moment, using Service-Based-Costing. According to the service-based costing, Customer A achieved a 23.81% profit margin, while customer B achieved a profit margin of -.38%. Using the old system, where overhead was not charged to the customer; both customers achieved a 16.67% margin. However, it is important to note that if Allied could price their products better, Customer B may be more profitable in the long run, due to their wide use of Allied’s offerings and products.

Yes, because it more effectively allocates overhead to each customer and shows the true profitability of each customer. Additionally, this kind of system could provide Allied the leverage and possibility of charging more for their products and being more profitable in the long-run. Service-based-pricing, in Allied’s case may not be too expensive to implement as evidenced by the relative ease that it took myself to allocate costs to each customer. Building SBP pricing into Allied’s invoicing system could prove to be profitable in the long-run and can establish the true profitability of their operations.

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 The TFC business seems to be an important part of the industry chain. However, Allied’s problem is that its customers seem to take advantage of them, and they seem to be at the back-end of the client’s concerns. Evidence to this is the amount of old inventory that sits in Allied’s warehouses that companies do not utilize. If Allied’s business offering was a more comprehensive document management system or they became at the forefront of the client’s concerns, they could potentially push through some pricing increases and gain some pricing power that way.

Additionally, extra services like Desktop delivery end up costing their clients more than their apparent usefulness, especially given company B’s usage of only 26 of these per anum. Additionally, a more effective inventory control system, ie an SAP solution to their accounting and distribution services, could make Allied more cost effective and eliminate the need for certain data-entry tasks. An online tool or RFID chip usage could greatly boost their business potential.