Customer profitability analysis Kronecker Company, a growing mail-order LO 3, 5, 7, 8, 9 clothing and accessory company, is concerned about its growing marketing, dis¬ tribution, selling, and administration expenses. It therefore examined its cus¬ tomer ordering patterns for the past year and identified four different types of customers, as illustrated below. Kronecker sends catalogs and flyers to all its cus¬ tomers several times a year, and maintains a toll-free number for customers to use when placing orders. Kronecker prides itself on the personal attention it pro¬ vides shoppers who order on the phone. Orders are taken over the phone or by mail. All purchases are paid for by check or credit card. Kronecker has a very generous return policy if customers are not satisfied with the merchandise re¬ ceived. Customers must pay return shipping charges, but their purchase price is then fully refunded.

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

REQUIRED

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

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

(c) What advice do you have for Kronecker regarding managing customer rela¬ tionships with the different types of customers represented above?

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CUSTOMER 1 CUSTOMER 2 CUSTOMER 3 CUSTOMER 4 Initial sales Number of items returned Dollar value of items returned Number of orders per year Number of phone orders $1000 0 0 1 1 $1000 4 200 609 $2500 2 500 400 $3000 24 1500 12 12 1 hour Time spent on phone 0.25 hours placing orders Number of overnight 1 0 0 12 deliveries Number of regular deliveries 0 6 4 0