Question

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)

Answer 1

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-
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