What is customer-profitability analysis?
It is the reporting and analysis of revenues earned from customers and costs incurred to earn those revenues.
What is price discounting?
A reduction of selling prices to encourage increases in customer purchases; a trade-off for larger sales volumes.
What are the levels in the customer cost hierarchy?
Customer output unit-level, customer batch-level, customer-sustaining, distribution-channel, and corporate-sustaining costs.
What other factors influence customer profitability beyond revenues and costs?
Retention likelihood, potential for sales growth, long-run profitability, demand from reference customers, and ability to learn from customers.
What does the whale curve illustrate?
Cumulative customer-level operating income, showing that a few customers generate most profits while some reduce overall profitability.
What is Return on Investment (ROI)?
ROI = Income ÷ Investment.
Why is ROI popular?
It blends revenues, costs, and investment into one percentage and can be compared across opportunities.
What is the DuPont method of ROI analysis?
ROI = Return on Sales × Investment Turnover.
What is Residual Income (RI)?
RI = Income − (Required Rate of Return × Investment).
What is Economic Value Added (EVA)?
EVA = After-tax operating income − [WACC × (Total assets − Current liabilities)].
What is Return on Sales (ROS)?
ROS = Operating income ÷ Revenues.
What are four common performance measures?
ROI, RI, EVA, and ROS.
What are alternative definitions of investment?
Total assets available, total assets employed, total assets employed minus current liabilities, and stockholders’ equity.
What are alternative definitions of cost for measurement?
Current cost, gross value of fixed assets, and net book value of fixed assets.
Why consider multiple time horizons in performance measures?
Because short-run actions may conflict with long-run goals; multiyear RI aligns with net present value.
What is productivity?
The relationship between actual inputs used and actual outputs produced.
What is partial productivity?
Output ÷ Specific input used (e.g., units per labor hour).
What is total factor productivity?
Output ÷ Costs of all inputs at current period prices.
What is moral hazard?
When employees exert less effort or report distorted information because effort or accuracy cannot be fully monitored.
What is the trade-off in incentives?
Balancing motivating managers with performance-based rewards versus exposing them to uncontrollable risks.
What is benchmarking in performance evaluation?
Comparing managers’ performance to similar operations to filter out uncontrollable factors.
What are preferred performance measures?
Measures sensitive to managers’ actions but not heavily affected by uncontrollable external factors.
What is team-based compensation?
Rewards based on team performance, encouraging collaboration but sometimes reducing individual incentives.
What challenges exist in multinational performance measurement?
Differences in inflation, exchange rates, legal, political, and economic environments across countries.
