Final answer:
Customer profitability analysis is most closely associated with activity-based costing (ABC), which helps firms accurately determine profitability by allocating costs according to the resources consumed by products and services.
Step-by-step explanation:
Customer profitability analysis is most closely tied to activity-based costing (ABC). This approach allocates costs to products and services based on the resources they consume, thereby giving managers a more accurate understanding of customer profitability. ABC allows firms to identify profitable and unprofitable customers by showing which products and services are consuming resources in ways that decrease profitability.
Understanding the breakdown of total costs — which includes fixed costs, variable costs, marginal costs, and others — is essential for profitability analysis, since these costs influence pricing strategies and profit maximization. When firms can accurately assign costs to specific activities, they gain valuable insights into cost-saving opportunities and price-setting.
Ultimately, customer profitability analysis using ABC helps in making informed decisions by comparing potential costs and benefits, aligning closely with a cost/benefit analysis that weighs marginal costs against marginal benefits. Each of these perspectives plays a crucial role in the decision-making process regarding production, pricing, and profit maximization.