1.

0 EXECUTIVE SUMMARY

This report is prepared in stages. Firstly, it explains a little bit about the background of
the company, Wangsa Jaya which has been designing, manufacturing and supplying electrical
supplies for the past 45 years. Furthermore, it also has invested heavily in researching and
developing to produce the most updated technologies to the customers as well as to keep pace
with the changing technology. Since the main customer group is automotive industry, the
production of the products like tire pressure sensor devices increased from 3,000 to 250,000 as a
result from the high technologies system.
Then, it mainly discuss about the problems and major issues faced by Wangsa Jaya with
regards to the implementation of the customer profitability system. Although the company’s
sales for both automotive and non-automotive segments have continued to rise but the profit
continued to shrink.
Next, the report moving forward to discuss on an analysis and evaluation of the initial
and revised version of customer profitability analysis system implemented by Wangsa Jaya.
After the Annual Board Meeting discussion, the internal auditor investigate further and analyse
two causes which are ineffectiveness of customer profitability system and ineffective cost
allocation for Warehousing and Shipping activities.
Moreover, the report will also discuss on several alternatives to solve the problem faced
by Wangsa Jaya in terms of revising the initial customer profitability system or revising the
incentive compensation as it indirectly related to cost.
To conclude the report, there is also recommendations and suggestion for Wangsa Jaya
to evaluate the cost and benefit of the alternatives before implementing the selected alternative.

2.0 THE PROTAGONIST

Based on the case, Wangsa Jaya itself is the main character as the problems and issues
discussed in the case were all related to Wangsa Jaya as a whole. Wangsa Jaya is a company that
designs, manufactures and supplies electrical and electronic components for the past 45 years.
Their main customer group is automotive industry.

1
 In addition, they had set their core strategic goal which is to grow and maintain sales
volume of automotive segment. Hence, in order to be ahead in the competitive market, the
company had invested heavily and continuously in their Research and Development activities to
come out with the most advanced products and services and to keep up with the dynamic market.
It resulted in the rising of demand from customers.
Apart from that, Wangsa Jaya also faced some financial issues associated with the
ineffective cost allocation method in deciding customer profitability which lead to the shrink of
profitability of Wangsa Jaya. On top of that, the management also concerned about the
unfairness in incentive compensation for the marketing department and other departments.
Hence, SWOT-TWOS analysis is used to look at the crucial aspects of the organization’s
environment to help them organizing their strategies to achieve the ultimate goal. There are four
elements in this analysis which are strength, weakness, opportunity and threat and TOWS was
used as a variation of SWOT to analyse the problem of Wangsa Jaya and discuss on the
reasonable strategies by accessing the company internal and external environment. The SWOT
TOWS matrix diagram is shown in Exhibit 1.
Initially, the strategies is developed by utilising the combination of Wangsa Jaya strength
and leveraging the electrics and electronics industry opportunity. Based on the ‘SO strategies’, it
can introduce new product and offerings with advanced technology embedded in its existing or
new product line as the company had already invested quite a lot in the research and
development. Besides, having an in-house production is a benefit to the company to fully utilise
the resources as the company’s ability to keep pace with the changing technology is proven to be
very successful. Plus, Wangsa Jaya can also create competitive advantage because it will be able
to provide a value added products. It can be resulting in grasping the market share of the
automotive electronics industry as well as meeting the increasing demand of the industry.
Secondly, as per ‘WO strategies’, there are few strategies to overcome the company’s
weakness by using its opportunity. The most profitable customers can only be access by an
effective profitability system yet the current customer profitability system failed to recognise that
specific type of customer and was contributing much help to the company. Hence, Wangsa Jaya
is advised to revise the customer profitability system in order to trace the high profitability
customer. Besides, in order to improve the financial condition of Wangsa Jaya, it has to manage
the cost associated with the employees. Therefore, it is advised that they revise the incentive

2
 scheme of the employees by managing the cost so that it will not exceed an acceptable range and
will be able to satisfy all employees.
Thirdly, the strength is being used to prevent to possibilities of threat as per discussed in
‘ST strategies’. It is known that there has been a fierce competition from international and
domestic competitors due to the increasing demand and attractiveness of automotive electronics
industry. Since Wangsa Jaya had already spent a huge amount on the investment of research and
development, it can be said that their products and services are the most advanced and varies that
can meet customers demand as compared to the other competitors who had left behind. So, the
best solution for this is to patent their products and technology to avoid from being quickly
devolved.
Last but not least, looking at ‘WT strategies’, it is focusing on solving the company
weakness and avoid any possible threat. From the case, the initial customer profitability system
helped in determine that the most profitable customer is automotive industry customer but it
failed to show the amount of profit the customer can give to Wangsa Jaya. As a result, it is
encouraged for Wangsa Jaya to do extensive marketing and offering to the existing non-
automotive industry customers for the non-automotive products as these customers can give high
profit and at the same time avoid from the fierce competition of automotive industry.

3.0 PROBLEMS

After analysing the situation of Wangsa Jaya, the problem arises when the company
implemented a customer profitability system to determine which customer provides the highest
profit and which one does not. As a result, the company’s profit keeps dropping as the sales
continuously increasing.
According to the initial customer profitability system, the most profitable customer is
Amers, then Bestari and the least profitable is Cempaka. There are three options that Wangsa
Jaya can consider. Firstly, it can keep all three customers secondly, to focus on the most
profitable customer and lastly, to drop the least profitable customer.
Based on the initial customer profitability analysis, Wangsa Jaya should retain Bestari as
it gave the most return against the cost although Amers showed the highest profitability. The net
profit of Bestari is 3.6% as compared with Amers and Cempaka with only 3.1%. Moreover,
Amers gave the highest profit to Wangsa Jaya because Amers is a large automobile industry

3
 client and always buys in a huge quantity which led to a high profit. So, in order to keep this high
profit, it is suggested that Wangsa Jaya need to focus on Amers and drop or eliminate the least
profitable client which is Cempaka. Even though both Amers and Cempaka have the same net
profit, Amers clearly give the highest income. Hence, eliminating Cempaka would help Wangsa
Jaya to focus on giving the best service to Amers by channeling the resources used for Cempaka
to Amers.

4.0 THE MAJOR ISSUES

There are two major issues pertaining to the customer profitability system that the
company initially used to analyse the most profitable customer which are the issues of decreasing
profit of the company while the sales keep increasing and the issues of the allocation cost for the
warehousing and shipping department.

4.1 Decreasing of profit while the sales is increasing

The first issues in this case arises when the company first apply the customer profitability
analysis but they found that their sales keep increasing from year 2003 to 2007, but on the other
hand, their profit is declining throughout the 5 years. This is what capture the eyes of the
manager. This is contradicting to the concept of customer profitability that supposedly need to be
in line with the increment of sales as well as their profit. Customer profitability system can be
defined as profit the firm makes from serving a customer or customer group over a specified
period of time, specifically the difference between the revenues earned from and the costs
associated with the customer relationship in a specified period. The analysis should reflect the
satisfactory of the customers by the higher profit of the company. However, this is different for
Wangsa Jaya case. The company’s profit keep declining year to year prior to the implementation
of customer profitability system. The issue worries the manager since they actually implement
customer profitability system for the company to analyse which customer brings out the better
profit for the company.

4.2 Ineffective cost allocation for warehousing and shipping department

Next, in this case, it can be clearly seen that warehousing and shipping cost is
problematic since there are so many rush order need to be completed but the company are

4
charging the same amount as the normal order. This may be the cause of the lower profit of the
company since they incur higher cost in order to meet the demand especially from Ameer since
Ameer requires 800 special orders to be done. However, in return the company did not get to
cover back the high cost they incurred for the special order since they only charge the same
amount to their special orders.
The customer profitability system used by the company for all the potential customer is
the same regardless of their orders and services provided by Wangsa Jaya. Those resources are
labor, time and warehouse. However, it is advisable for the company to revise back the customer
profitable system especially for the warehouse and shipping costs since the special order need
more time as well as higher cost in order to produce the product. The managers need to also take
into account on the special order demanded by the company to be able to cover back for the
higher cost incurred for the special order. This is because in order to produce the special order,
the cost for labour is increasing as well as the time taken for them to complete the rush order.
The company need to properly allocate the proper cost for the warehouse and shipping
department since this department incur higher cost in order to finish up the special order. All in
all, the company should first revise back their customer profitability system.
As the result of both major issues arise in this case, Wangsa Jaya also need to face
another problem which is the issue of incentives for managers as well as the marketing
managers. It is clearly stated in the case that bonuses of most managers are decreasing while
bonuses for the marketing managers keep increasing due to the increment of the company’s
sales. This also result in the frustration of shareholders of the company. The board of directors
are worried of the performance of the company since their sales is increasing while their profit
keeps declining. This kind of performance affect the trust of their shareholders towards the
company since the company’s profit is the most important aspect for every shareholder. They
will expect their investment will grow bigger day by day, and of the investment does not give a
good return, they could easily lose interest to invest in Wangsa Jaya.
Wangsa Jaya’s incentive plans relate primarily to sales and market growth, marketing
personnel are paid a base salary plus commissions based on dollar volume of sales; most
marketing employees generate about 80 percent of their earnings through sales commissions.
Wangsa Jaya’s management believes that support for customer sales is critical to building and
maintaining market share and customer satisfaction. Therefore, key warehousing, shipping, and

5
 customer service personnel also receive bonuses based on the volume of sales. A second bonus
pool, equal to 10 percent of net income, comprises the bonus pool for all other key personnel.
It is believed that this type of bonus plan only benefit certain party and is not fair for the
employees as a whole because there are many employees in different departments working very
hard to achieve the company’s goal yet only certain group of employees are getting more
recognition and incentive.
The problem when linking bonuses to sales volume can clearly be seen when the
marketing managers are earning more than the managers from other department which is not
quite fair for the rest of the managers. This is because the marketing team will only focus on
increasing and attracting the number of customers without taking into account the cost that
associated along with the sales orders that had to be bear by other department for instance the
manufacturing department as well as the warehousing and shipping department. It created
unsatisfactory among the employees who also put their fullest effort in meeting the demand of
the customers but still did not being paid as good as the marketing team. Hence, it would lead to
demotivation of the employees and results in bad performance which could give a huge impact to
the company as a whole as they could not deliver the products on time.
Moreover, another problem when linking bonuses to sales volume is the selling expense
will continue to rise together with sales growth and cause low profit or even loss to the business.
As mentioned in the case, half of the selling expense consist of sales salaries and commissions,
this shows that as long as the sales growth continue to rise, the managers will be given
commission which cause the selling cost to rise continuously.

5.0 ALTERNATIVES AVAILABLE TO PROTAGONIST

In order to solve the issues of declining profits and increasing cost for warehousing and
shipping department, one of the alternatives that Wangsa Jaya should take is to reconstruct the
initial customer profitability analysis by revising the cost and cost allocation. In the initial
analysis, the costs for each activity are calculated by using one average rate without taking into
account the activities performed. It shows that the costs are ineffectively allocated and it gives
inaccurate results to determine which one is the profitable customer.

6
 Due to that, the fixed rate used for all costs need to be changed to cost driver. Then, the
cost driver should be reallocated for each activity performed which are facility cost, inventory
and handling cost and pulling and shipping cost.
Secondly, to overcome the issues of sales-based bonuses, one alternative that Wangsa
Jaya can implement is performance-based bonuses which measure the performance and
productivity of the workers and pay bonuses according to the results. Since Wangsa Jaya are
focusing on the profitability strategy, a performance-based incentive is better where all
employees are paid based on the profit made from the business. Performance-based bonuses
might offer bonuses for achieving a specific sales goal or for proposing an idea that saves
money. This incentive scheme also might be offered for extraordinary performance after
completion, appraisal and analysis of a specific project. If the commission is paid based on the
performance, managers in each department can work out in finding solution to increase the
performance of the company to get commission at the end of the period. This will eliminate the
huge discrepancies in the amount of bonuses which different managers are entitled to since all
managers will be paid based on the overall performance of the company and not solely on sales
volume.
Moreover, if Wangsa Jaya implement performance-based bonuses, the BOD can perform
employee performance-evaluation process. The results will show which departments are lacking
and this will improve profitability of the company. Employee will be more motivated towards
the company goals rather than focusing on their self-reward. If the employees are paid based on
the profit of the company, they can minimize the selling cost since all workers are paid based on
certain percentage out of the profit.

6.0 DECISION CRITERIA

Wangsa Jaya should implement the revised customer profitability analysis since the
company will be able to allocate cost for each key activities better and in a more detailed
computation as per Exhibit 3.

7
7.0 EVALUATION OF ALTERNATIVES AND DECISION CRITERIA

Based on the proposed analysis, Bestari is the most profitable customer while Cempaka
and Amers are the second profitable and least profitable customer. As shown in Exhibit 3, there
are differences between the percentage of customer profitability out of sales in the initial and
proposed analysis. By using the initial customer profitability analysis, all customers are able to
make profit with 3.6% for Bestari and 3.1% for Amers and Cempaka.
On the other hand, when using the proposed analysis, only Bestari and Cempaka are able
to make profit while Amers is facing loss. However, the percentage of customer profitability out
of sales for Bestari in the proposed analysis is increasing from 3.6% to 8.1%. The differences in
the percentage arise due to the inability of the company to determine the costs for each customer
accurately when using the initial analysis.
Due to that, it is important for Wangsa Jaya to undertake this proposed customer
profitability analysis because it helps Wangsa Jaya in better allocating the manufacturing
overhead costs to the key activities.
Referring to Exhibit 2 under the new analysis, overhead costs will be assigned by key
activities instead of accumulating all costs in one company-wide pool. Then, the costs will be
categorized into different cost pools based on a cost-driver as an allocation rate. The cost driver
acts in determining costs related to each customer and in computing the profitability for each
customer which are Amers, Bestari and Cempaka. From this, it helps the managers to determine
which customers are profitable and which ones are not.
Besides, since there is detailed computation under the proposed analysis, it will result in
more accurate information on the cost and profitability of customers provided to the company.
Other than that, it also help the managers to identify which key activities that are unnecessary
and incur high cost. So that, they can reduce those activities thus, reduce the overhead costs.

8.0 RECOMMENDATIONS

Two major challenges that Wangsa Jaya is currently facing is the continuous declining in
profit even though the sales growth is positive. In relation to that, the BOD is searching for the
best profitability system to solve this problem. However, after implementing the first profitability
system for a year, the profit still declined. The second major challenge is in terms of their

8
warehousing and shipping (W&S) cost and also general and administrative (G&A) cost that
seems to be high. This is because of the special customer with special service orders that requires
higher cost.
One contemporary management accounting technique that will assist Wangsa Jaya is
Activity Based Costing system. Activity based of costing is very much based on the activities
while manufacturing the products. The activities will decide the actual cost that could be
distributed in fixed and variable costing. Activity based costing gather the entire costing
information of single manufacturing task in one irrespective of their category such as labour or
materials. It is very much based on the activities for instance the production of electrical parts
and components which would be based on the several activities like assembling the parts, quality
check, and final products by testing the products.
With the help of these activities amount of labour, materials and the time are being
calculated in order to fix price of the products. Activity Based Costing will help Wangsa Jaya to
segregate the high and low cost of the production on the basis of activities and task. If they can
manage the cost of W&S and G&A, they can increase the sales and achieve profit on the same
time.

9
9.0 APPENDIX
EXHIBIT 1: SWOT TOWS matrix diagram

Strengths Weaknesses
1. Continuous investment in 1. Ineffective costing
Research & Development. practices, increase in sales
2. In-house manufacturing, but decrease in profit.
designing and installation. 2. Lacked of communication
3. Adapt with changes between departments.
technologies.

Opportunities SO Strategies WO Strategies

1. Increasing demand for ● Introduce new product ● Revise the customer
automotive electronic offerings with advanced profitability analysis.
products. technology embedded - ● Revise incentive scheme.
2. High market share in competitive advantage.
automotive electronics
industry.

Threats ST Strategies WT Strategies

1. Fierce competition in ● Offer advanced products ● Fierce marketing and
automotive electronics and services with lower offerings to customer in
industry. price. other industry.
2. Products easily being ● Patent the products.
copied.

EXHIBIT 2: Allocation of Cost based on Cost Drivers in the key Activity Areas

Key Activity Cost driver Costs Total cost Cost/unit of

driver cost driver

Facility Costs & Inventory Dollar volume of inventory 8,485,000 16,630,890.41 0.5102
Storage and Handling Costs

Pulling and Shipping Costs

-Setting up order and Number of orders 982,000 7800 orders 125.90
preparing for shipment

-Loading orders and Retail value (sales) 2,946,000 230,000,000 0.0128

shipping

-Providing special product Number of orders requiring 5,892,000 3400 orders 1732.94
handling services special packaging or other
services

10
EXHIBIT 3: Revised Customer Profitability System

Amers Bestari Cempaka

Sales 14,500,000 5,600,000 1,800,000

Cost of Goods Sold (10,150,000) (3,892,000) (1,260,000)
Gross Profit 4,350,000 1,708,000 540,000

General and Administrative 2,707,150 1,045,520 336,060

Warehousing and Shipping

Facility Costs & Inventory Storage and 851,265 108,805 70,449
Handling Costs (0.5102x1,668,493) (0.5102x213,260) (0.5102x138,082)

Pulling and Shipping Costs

-Setting up order and preparing for 163,670 20,144 13,849
shipment (125.90x1300) (125.90x160) (125.90x110)

-Loading orders and shipping 185,600 71,680 23,040

(0.0128x14,500,000) (0.0128x5,600,000) (0.0128x1,800,000)

-Providing special product handling 1,386,352 8665 69,318

services (1732.94x800) (1732.94x5) (1732.94x40)

Customer Profitability (944,037) 453,186 27,284

% of Customer Profitability/Sales -6.5% 8.1% 1.5%

11
10.0 REFERENCES

1. Case 1: Wangsa Jaya Electrical and Electronic Supplies

2. Small Business Trends (2015). 11 Tips for Creating Performance-Based Bonuses.
Retrieved from https://smallbiztrends.com/2015/02/11-tips-creating-performance-based-
bonuses.html
3. My Customer (2018). Six steps to customer profitability analysis. Retrieved from
https://www.mycustomer.com/marketing/strategy/six-steps-to-customer-profitability-
analysis

12