Question

schneider Company, a growing mail-order clothing and accessory company, is concerned about its growing MSDA expenses. It, therefore, examined its customer ordering patterns for the past year and identified four different types of customers, as illustrated in the following table.

	Customer Type 1	Customer Type 2	Customer Type 3	Customer Type 4
Initial sales	$1800	$1000	$2600	$2900
Number of items returned	0	6	6	26
Dollar value of items returned	0	$140	$530	$1700
Number of orders per year	1	5	4	13
Number of phone orders per year	1	0	0	13
Time spent on phone placing orders*	0.50 HOUR	0	0	1.25 HOUR
Number of overnight deliveries	1	0	0	13
Number of regular deliveries	0	5	4	0
*total for the year

Schneider sends catalogs and flyers to all its customers several times a year. Orders are taken by mail or over the phone. Schneider maintains a toll-free number for customers to use when placing orders over the phone. Schneider prides itself on the personal attention it provides shoppers who order over the phone. All purchases are paid for by check or credit card. Schneider has a very generous return policy if customers are not satisfied with the merchandise received. Customers must pay return shipping charges, but their purchase price is then fully refunded.

Prices are set so that cost of goods sold is on average about 75% of the sales price. Customers pay actual shipping charges, but extra processing is required for overnight deliveries. Schneider has developed the following activity cost driver rates for its support costs:

Activity	Activity Cost Driver Rate
Process mail orders	$11 per order
Process phone orders	$55 per hour
Process returns	$2 per item returned
Process overnight delivery requests	$3 per request
Maintain customer relations (send catalogs and respond to customer comments or complaints)	$50 per year

Requirements

(a) Using activity-based costing, determine the yearly profit associated with each of the four customers described.

(b) Comment on which customers are most profitable and why.

(c) What advice do you have for Schneider regarding managing customer relationships with the different types of customers represented?

Requirement (a) Using activity-based costing, determine the yearly profit associated with each of the four customers described. (Enter a "0" for any zero amounts. Use parentheses or a minus sign for loss amounts or percentages. Round dollar amounts to the nearest dollar and round the gross profit (% of sales) to the nearest whole percent, X%.)

	Customer Type 1	Customer Type 2	Customer Type 3	Customer Type 4
Sales
Less returns
Net sales
Cost of goods sold, based on net sales
Process mail orders
Process phone orders
Process returns
Process overnight delivery requests
Maintain customer relations
Gross profit
Gross profit (% of sales)

Answer 1

Customer type 3 is most profitable customer with Gross profit % of 19.88%. This profit is because of following reasons :- Higher sale value, less phone orders, working in day hours and less returned quantity.
					Customer relationship with :-
Customer type A
Increase in sales price
Processing in day not night
Customer type B
More return are coming
Customer type D
More returns are coming
Phone order should be restricted
Overnight delivery more than normal devidru