Question

In: Accounting

Portal ?Company, a growing? mail-order clothing and accessory? company, is concerned about its growing MSDA expenses....

Portal ?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 1,300 1,400 2,100 3,100
Number of items returned 0 7 7 21
Dollar value of items returned 0 $150 520 1,700
Number of orders per year 1 9 4 13
Number of phone orders per year 1 0 0 13
Time spent on phone placing orders* 0.75 hour 0 0 1.75 hour(s)
Number of overnight deliveries 1 0 0 13
Number of regular deliveries 0 9 4 0
*total for the year

Prices are set so that cost of goods sold is on average about 65% of the sales price. Customers pay actual shipping? charges, but extra processing is required for overnight deliveries. Portal has developed the following activity cost driver rates for its support? costs

Activity Activity Cost Driver Rate
Process mail orders $ 9 per order
Process phone orders $ 75 per hour
Process returns $ 9 per item returned
Process overnight delivery requests $ 5 per request

Maintain customer relations
(send catalogs and respond to
customer comments or complaints)

$ 50 per yea

Portal sends catalogs and flyers to all its customers several times a year. Orders are taken by mail or over the phone. Portal maintains a? toll-free number for customers to use when placing orders over the phone. Portal prides itself on the personal attention it provides shoppers who order over the phone. All purchases are paid for by check or credit card. Portal 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.

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
SchneiderPortal
regarding managing customer relationships with the different types of customers? represented?
Sales Customer Type 1 Customer Type 2 Customer Type 3 Customer Type 4
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)

Solutions

Expert Solution

Activity Activity Cost Driver Rate
Process mail orders $ 9 per order
Process phone orders $ 75 per hour
Process returns $ 9 per item returned
Process overnight delivery requests $ 5 per request
Maintain customer relations $ 50 per yea
Activities Customer Type 1 Customer Type 2 Customer Type 3 Customer Type 4
Cost of Process Mail Orders 9 81 36 117
= No. Of Orders*Cost per order =1*9 =9*9 =4*9 =13*9
Cost of Process Phone Orders 56.25 0 0 1706.25
= No. Of Phone Orders* Time spent on Phone* Rate per hour =1*.75*75 0 0 =13*1.75*75
Cost of Process Returns 0 63 63 189
No. Of items Returned*rate per item Returned =0*9 =7*9 =7*9 =21*9
Cost Of Process overnight delivery requests 5 0 0 65
No. Of overnight Deliveries*Rate per request =1*5 =0*5 =0*5 =13*5
Cost of Maintaining Customer relation 50 50 50 50
Customer Type 1 Customer Type 2 Customer Type 3 Customer Type 4
Sales 1,300 1,400 2,100 3,100
Less returns 0 150 520 1,700
Net sales 1,300 1,250 1,580 1,400
Cost of goods sold, based on net sales( 65% of Sales) 845 812.5 1027 910
Process mail orders 9 81 36 117
Process phone orders 56.25 0 0 1706.25
Process returns 0 63 63 189
Process overnight delivery requests 5 0 0 65
Maintain customer relations 50 50 50 50
Gross profit 334.75 243.50 404.00 -1,637.25
Gross profit (% of sales) 26% 17% 19% -53%
(a) Customer Type 1 Customer Type 2 Customer Type 3 Customer Type 4
Yearly Profit associated with each customer 334.75 243.50 404.00 -1,637.25
(b) Customer Type-1 is the most profitable because the profit as a percentage of sales is the highest among the 4 customer types.
(c) Schneider portal is receiving the maximum profit from Customer type 1, so this is the valued customer and should focus on the same, also there are very high sales return for customer type 4, so schneider portal should look into the reason for the same.
Assumption: Inital sales are assumed to be sales value and not the sales units.
Note-
Best effort have been made to answer the question correctly, in case of any discrepencies kindly comment and i will try to resolve it as soon as possible.
Please provide positive feedback.

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