Boston Depot sells office supplies to area corporations and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a "commodity" business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root cause of declining profits, he decided to analyze the profitability of two of the firm's major customers: Omega International (OI) and City of Albion (CA).

According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated here:

	OI	CA
Sales	$ 80,000	$ 80,000
Product cost	(50,000)	(48,000)
Service fees (17.5% of sales)	(14,000)	(14,000)
Gross margin	$ 16,000	$ 18,000
Gross margin ratio	20.0%	22.5%

Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as handling customers' requests, pick-packing, order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operations Manager, Jamie Steel, points out that CA has been a much heavier service user than OI. She shows the following data to support her belief:

	OI	CA
Number of requisitions	300	700
Requisition line (all pick-packing)	900	2,100
Average number of cartons in warehouse	50	500
Number of miles per delivery	5	6

Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:

Activity	Annual Expense	Cost Driver	Activity Level
Requisitions handling	$3,000,000	Requisitions	300,000
Warehouse	1,050,000	Number of cartons	70,000
Pick-packing	900,000	Pick-pack lines	600,000
Data entry	600,000	Pick-pack lines	600,000
Delivery charge	$10 per requisition (delivery) plus $0.30 per mile

Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the same.

Help Tom Delayne understand how Boston Depot can improve its profitability.