Customer profitability analysis. Zoots Suits is a ready-to-wear suit manufacturer with headquarters in Toronto. Zoot’s has three customers:

April Department Stores, a large department store chain that uses Zoot’s to manufacture its own private-label brand Brothers Stores, a chain of mall-based men’s clothing stores Suitors, a company that sells suits to students on campus through a network of salesper¬

CHAPTER 16 sons who travel across the country visiting college and university campuses Zoot’s owner and CEO A1 Sims has developed the following activity-based costing system:

Activity Area Cost Driver Rate in 2007 1. Order processing Purchase order $ 269.50 2. Sales visits Sales visit $1,573.00 3. Delivery—regular Regular delivery $ 330.00 4. Delivery—rushed Rushed delivery $ 935.00 5. Returns processing Return $ 203.50 Each suit returned also incurs a $5 stocking fee. In addition, Zoot’s credits the customer’s account for the full purchase price of all suits returned. Sims wants to evaluate the profitabil¬

ity of each of the three customers in 2007 in order to explore opportunities for increasing the profitability of his company in 2008. Use the following data to answer the questions that follow:

Item Total number of orders Total number of sales visits Regular deliveries Rush deliveries Number ofreturns Average number ofsuits per order List selling price Average selling price Average cost Average number ofsuits returned April Brothers Suitors 44 62 212 8 12 22 41 48 166 3 14 46 4 6 16 400 200 30

$200 $200 $200

$140 $160 $170

$110 $110 $110 220 160 80 Required Calculate the operating income per customer. Who is the most profitable customer? Who is the least profitable customer? What contributes to each customer’s profitability (or lack thereof)?

Provide some recommendations for A1 Sims to ponder as he considers his options for increasing the company’s profitability in 2007.