Customer Profitability Analysis: 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 Ol and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to Ol, as demonstrated here: Customer Profitability Analysis Omega International $80,000 (50,000) Sales Product cost Service fees (17.5% of sales) (14,000) Gross margin Gross margin percent $16,000 20% City of Albion $ 80,000 (48,000) (14,000) $ 18,000 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, Operation Manager, Jamie Steel, points out that CA has been a much heavier service user than Ol. She shows the following data to support her belief: Distribution Services Activities for Ol and CA Number of requisitions Requisition line (all pick-packing) OI CA 300 700 900 2.100 Average number of cartons in warehouse 50 500 Number of miles per delivery 56 Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings: Total Estimated Estimated Annual Activity Annual Expense Requisitions handling $ 3,000,000 Cost Driver Requisitions Activity Level 300,000 Warehouse 1.050.000 Number of cartons 70,000 900,000 Pick-pack lines 600,000 600,000 Pick-pack lines 600,000 Pick-packing Data entry 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