Johnson Beverage, Inc.

Case Solution

Luann J. Lynch
Darden School of Business ()

Johnson Beverage owner Jack Johnson just received word that one of his most important and loyal customers may want to negotiate a lower price for his products. Information collected by Johnson’s accountants, in which customer service costs are assigned to customers as a percentage of sales, suggests that the customer’s profit margin is too low to support a price drop. Students are expected to design an activity-based system to allocate customer service costs and use it to estimate customer profitability for multiple customers. The revised cost reflects that the customer has low customer service resource requirements and is profitable enough to allow Johnson Beverage to negotiate the price to keep the business going. Further analysis identifies some unprofitable clients that were previously considered profitable and that offer opportunities for strategic decisions that lead to improved earnings.

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