Customer profitability analysis; product profitability; customer performance measures: manufacturer Waratah Ltd manufactures electronic devices, including PDAS, MP3 and MP4 players, for home and business use. Three years ago, it implemented an activity-based costing (ABC) system. Both the management accountants and the manufacturing managers are very pleased with the results, as they now have accurate product costing information that they can use for a variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of Waratah's major products are as follows: Activity PDA basic PDA+ PDA/phone Designing $ 100 $ 110 $ 125 Purchasing 150 95 130 Assembling 890 1200 1400 Finishing 260 250 250 Total activity cost $1 400 $1655 $1 905 In July, Hannah Allen, the assistant accountant, noticed that over the last six months the spending in both the customer support department and the sales department had been steadily increasing. The previous month's costs had been 20 per cent above budget! The customer support supervisor, Bill Dominico, is able to explain exactly why this is happening. He has had to employ new staff, there is more overtime being worked, and some of the service calls have been outsourced to a third-party maintenance company. But all this was necessary, as he explains: If a customer has a problem, we have to fix it! And if we have spent more than our budget, then that is just too bad. It is important to keep customers happy. Why, only the other day the managing director was telling us how important our customers are and how customer satisfaction is critical to the company's success.Hannah asks Bill if she can have access to the records of his department for the past three months (June quarter). She intends to analyse the service calls to see exactly where the extra money is being spent. She also plans to analyse the selling expenses that have occurred during June quarter. The analysis reveals the following data:The cost of selling and customer support activities, and selling price for each product, are as follows: PDA basic PDA+ PDA/phone Activities: Selling $39 000 $ 33 750 $ 9000 Customer support 78 300 123 750 20 200 Selling price per unit 2000 2600 2 800 The company's customers can be analysed into three main groups: educational institutions, business and home entertainment. The sales to these groups during the June quarter are detailed below: Customer groups PDA basic PDA+ PDA/phone Educational institutions 150 40 Business 20 30 Home entertainment 130 80 Total sales 300 150The costs of customer support and selling activities for each customer group are as follows: Educational Business Home entertainment Selling expenses $28 000 $25 750 $28 000 Customer support 86 000 49 750 86 500