HUMAN RESOURCE DECISIONS 151
Table 10.8 DMC variable costs
Contract 1 Contract 2 Contract 3 TotalActual variable labour costs 3,750 5,000 8,000 16,750
Standard variable labour costs 3,600 4,200 7,920 15,720
Difference 150 800 80 1,030
Of the gap between budget and actual profit, £3,280 is accounted for by the cost
of unused capacity in variable labour. This gap has been offset to some extent by
the reduction in variable labour costs of £2,250. There remains the capability to
reduce variable costs to meet the actual transaction volume, as Table 10.8 shows.
What conclusions can be drawn from this information?
It is clear that DMC has either to increase its income or reduce its costs in order
to reach its profitability targets. The company has a significant cost of unused
capacity. However, it can only reduce this unused capacity based on sound
market evidence or else it may be constraining its ability to provide services to its
customers in future, which may in turn result in a greater loss of income. DMC
needs to renegotiate its prices and volumes with its customers.
Case study: Trojan Sales – the cost of losing a customer............
Trojan Sales is a business employing a number of sales representatives, each
costing the business £40,000 per annum, a figure that includes salary, oncosts and
motor vehicle running costs. Sales representatives also earn a commission of 1%
on the orders placed by their customers. On average, each sales representative
looks after 100 customers (one driver of activity) and each year, customers place
an average of five orders, with an average order size of £2,500. Therefore, each
representative generates sales of:
100 × 5 ×£2, 500 =£1, 250 , 000
and earns commission of 1%, amounting to £12,500.
However, Trojan suffers from a loss to competitors of about 10% of its customer
base each year. Consequently, only about 70% of each sales representative’s time is
spent with existing customers, the other 30% being spent on winning replacement
customers, with each representative needing to find 10 new customers each year
(a second driver of activity). The business wants to undertake a campaign to
prevent the loss of customers and has asked for a calculation of the cost of each
lost customer.