14 - Gross margins and recoverability Flashcards
What is the primary driver of the increase in services provided by final-tier trade channels?
The potential of earning higher margins than simply reselling product.
How does the cost of sales behave in a service business with in-house employees?
It is virtually fixed, leading to fluctuations in gross and net margins as sales fluctuate.
What happens to gross and net profit once a business moves above break-even?
The next $100,000 of sales goes straight to the bottom line as $100,000 of gross and net profit.
What is the difference between full costing and marginal costing?
In full costing, resources consumed by a contract are charged against its revenues, while marginal costing does not consider all costs.
What is the implication of having unused resources in a service provider’s accounting?
Unused resources can impact overall profitability and may be treated differently in accounts.
List the three alternatives for accounting for unused resources.
- Treat all billable staff costs as cost of sales
- Show all people costs as overheads
- Charge used time of billable staff as cost of sales and leave unused resources in overheads.
What is the typical gross margin for low-end services?
Approximately 33 percent.
What is the typical gross margin for high-end services?
Approximately 80 percent.
True or False: The more differentiated the service, the higher the potential margin.
True.
What is recoverability in the context of service contracts?
The proportion of fully priced resources consumed by a contract that the customer agrees to pay for.
What has happened to XYZ Co’s recoverability rate from the prior year to the current year?
It has slipped from 85 percent to 75 percent.
How can a service provider cope with increased demand beyond their capacity?
By using subcontractors.
What are some key features of a web-based service model?
- Instant availability
- Responsiveness
- Convenience
- Flexibility
- Limitless patience.
What is a critical measure for assessing the utilization of infrastructure in a web-based service?
Volumes processed (revenues, transactions, customers handled).
What does customer browsing behavior include?
- Pages customers used to enter the site
- Pages they arrived from
- Time spent on the site
- Pages visited.
What is the significance of downtime in a web-based service?
It measures the length of time the service is unavailable to users and affects customer impact.
What are customer transaction success/failure rates used for?
To identify at which stages in the transaction process customers are lost.
What can sophisticated systems identify regarding customers affected by downtime?
Specific customers or groups of customers and calculate the cost in terms of money or customer impact.
What are customer transaction success/failure rates used to identify?
At which stages in the transaction processing process the customer is lost.
What is one major frustration for online services related to transaction abandonment?
The abandonment of the process part-way through.
What may cause customers to abandon the transaction process?
- Appearance of charges late in the process
- Request for too much personal information
- Confusing signposting
- Poor site design
- Finding a better offer
What factors may throttle transaction volumes or increase failure rates?
Transaction processing times or delays and connection speeds by region and by hour.
How do the measures for web-based service model compare to people-based service model?
They mirror the measures of establishing a capability which needs to operate at close to capacity to deliver the highest margins.
What do measures of downtime, transaction failure rates, processing delays, and connection speeds together measure?
The drivers of online recoverability.
