EGON & SONS

When to drop an unprofitable

customer

Offiong Asanga

22 October, 2020

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DASHBOARD

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Three key mesages Recommendation to drop
Westmid Account or not
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Lessons learnt :

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THREE KEY MESSAGES
• The three key messages from the case are :

1.Establishment of a proper costing method for the different SKUs.

2.Conducting proper analysis geared at objective decision making.

3.Decision should be made while considering both quantitative and qualitative (the intangible) factors.

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RECOMMENDATION TO DROP WESTMID ACCOUNT OR NOT
Tommy should take a decision based on the following parameters:

The ultimate goal of any business concern is profitability. Consequently, if current profitability were to be fully

considered in the referenced case, Tommy should recommend the drop of Westmid account as a customer. However,

looking at the case from other perspectives listed below, Tommy should not consider recommending the drop of

Westmid account:

The considerations are:

1.Westmid cost Egan 40% of the its profit. This indicates that Westmid still represents one its biggest customers. The fix
cost burden of Egan might have to be spread on other customers.
2.Egan may lose valuable sources of information, experimentation, and innovation in the market considering the
number of year Westmid has in the market. Westmid had been Egan’s customer for 63 years.
3.Egan might risk losing Westmid to Chinese competitors, who might capitalize on the opportunity to service a large
customer with prospects like Westmid.
4.There is risk of loss of other loyal customers as a result of suspicion that similar action could be taken against them.
5.The decision to drop Westmid might lead to front line employees feeling threatened of job loss and might leave to
competitors’ organization.
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RECOMMENDATION TO DROP WESTMID ACCOUNT OR NOT (CONTD.)

6.By dropping Westmid, Egan risks negative publicity from the community who might have benefited from
Westmid range of services, offered in the building industry over the years.

7. Egan needs to assess and take advantage of current and future expansion and diversification strategy
of Westmid relative to her own business.

8. Dropping Westmid might lead to legal and ethical issues, thereby, negating the corporate social
responsibility that should be embedded in Egan.

9. The losses that arose from the business relationship between Egan and Westmid might be largely as
result of internal process inefficiencies and ineffectiveness of Egan’s costing and pricing policy. This
should be adequately reviewed.

10. From the description in the case study, Westmid serves as a strategic partner to Egan’s businesses. It
provides warehouse facility to Egan’s wide range of products. It also provides advertising opportunities to
Egan’s products through its Magazine. These are other benefits that should be duly considered in the
decision-making process as they might have positively impact Egan’s profitability in other areas.

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LESSONS LEARNT
Lesson for the organization and implication for the Internal Audit function includes:
 Organization:
1. The need to hire competent set of employees (Cost Accountant), with good knowledge of costing should be
considered.

Effective management decisions can only be taken with the right knowledge/information.
2. Profit is not necessarily determined by sales volume or revenue, but by accurate pricing.

3. The big customers are not always the profitable customer.

4. Not all products generate good returns and there may be a need to discontinue some product lines.

5. From the case study, there is need to develop good internal control processes to eliminate waste and reduce losses.

 Internal Audit function:

1. Need to perform periodic risk assessment of the company’s processes.
2. Carry our Internal Audit of the company’s processes with a view to assessing the effectiveness of the controls and
generally, the control environment.
3. Verifying and analyzing facts and figures presented in the financial statement. 6
Thank you