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Data Services at Armistead Case Solution
The case study analysis deals with the data services division at Armistead was launched with an intention to utilize the vacant shift that was available with the company. From a strategic point of view, the initiative made sense because the company did not have a better use for its excess capacity, and the business proposition was in harmonization with other operations of the company. The division is potentially an attractive opportunity, as it provides its customers with a significant cost advantage, and is facing very limited competition. It may also be beneficial for the company to expand the division and acquire more customers because the switching costs for customers are high. The analysis shows the switching costs make it difficult for the company's continuing customers to leave the company for the present (or potential future) competitors. Therefore, the data services division appears a good investment from a strategic perspective. The consistent losses faced by the division are probably a result of financial problems.
Data Services at Armistead Case Analysis
It is important to investigate the time that it takes for a continuing customer to recover the cost that is spent on acquiring it. The average acquisition cost for each customer can be calculated by dividing the total acquisition cost for the year with the total customers acquired during the year. The yearly contribution made by each customer can be calculated by dividing the income from continuing operation with the average customers for the year. After performing these calculations, the payback period (in years) is simply an average acquisition cost divided by the yearly contribution per customer. We find that it takes 3.4 years for the company to recover the acquisition cost spent on each customer.
To appease the management, it is important that the data services division starts posting positive profits. Therefore, it is important to calculate the minimum number of continuing customers that will enable the company to cover the annual acquisition costs. To estimate the annual acquisition costs, we need to make an assumption about the number of new customers that the company will attract each year. It is assumed that the company will continue its aggressive customer acquisition and attract fifteen customers each year. Therefore, the annual acquisition costs are calculated by multiplying the average customer acquisition cost (calculated previously) by fifteen. The number of continuing customers needed to cover this acquisition cost is calculated by dividing the annual acquisition costs by the yearly contribution made by each customer (calculated previously). It is found that the minimum number of customers needed for the company to post positive profits is 51. Therefore, it can be expected that the company will start posting positive profits from next year when the customers exceed this breakeven amount.
Data Services at Armistead |
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Monthly Value Added by Continuing Customer |
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$ |
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Average Continuing Customers |
39 |
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Fixed Cost per Customer |
4,316 |
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Cost Dependant on Shifts |
233,333 |
Average Shifts |
35,440 |
Monthly Cost per Shift |
6.6 |
Weighted Monthly Rate |
15.2 |
Contribution Margin per Shift |
8.6 |
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Average Shifts per Customer | 909 |
Total Contribution Margin per Customer | 7,821 |
Net Contribution per Customer (per month) | 3,504 |
Recovery of Acquisition Costs |
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Average Continuing Customers |
39 |
Customers Acquired During the Year |
14 |
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Acquisition Costs per Customer ($) |
137,857 |
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Contribution per Customer per year ($) |
40,513 |
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Payback Period (denoted in years) |
3.40 |
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