E-Power Deliveries owns a fleet of electric vehicles that it uses to make deliveries and pickups for customers in the city of Kitchener, Ontario. The company limits its services to overnight deliveries within the surrounding Waterloo region. The company president, Andre Kuvinder, is concerned because of a recent negative trend in net income despite a growing number of customers. In an effort to resolve this situation, he is looking for accounting assistance to better understand operational costs.

Andre has hired a recently designated CPA to help him solve the dilemma. The CPA has decided to implement an activity-based costing system designed to provide relevant information to assist with decision making. The ABC system she designed has four activity cost pools: Travel (from customer to package recipient), Pickup and Delivery, Customer Service, and Other. The activity measures are kilometres for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool (includes repeat deliveries if required), and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure.

The following actual costs will be assigned using the activity-based costing system:

Driver wages	$245,000
Vehicle operating expense	12,800
Vehicle depreciation	70,000
Dispatch personnel salaries	80,000
Office expenses	28,000
Administrative expenses	69,000
Total	$504,800

The distribution of resource consumption across the activity cost pools is as follows:

	Activity Cost Pools
	Travel	Pickup andDelivery	CustomerService	Other	Total
Distribution:
Driver wages	85%	10%	5%	0%	100%
Vehicle operating expense	80%	20%	0%	0%	100%
Vehicle depreciation	80%	20%	0%	0%	100%
Dispatch personnel salaries	0%	0%	95%	5%	100%
Office expenses	0%	10%	65%	25%	100%
Administrative expenses	0%	15%	75%	10%	100%

The activity measures and activity levels are presented below:

Activity Cost Pool:	Activity Measure	Expected Activity
Travel	Kilometres	64,600
Pickup and Delivery	Pickup/Delivery Trips	2,750
Customer Service	Number of customers	82
Other	No activity measure

To get started Andre has asked that just two customers be reviewed before applying the analysis to the rest of the companys customer list. The actual activity for the two customers was determined to be:

Activity data for the following two customers:	Mar Supply Co.	Hep Homes Inc.
Kilometres travelled for pickup/deliveries	185	392
Number of Pickup/Delivery trips	8	22

To date, E-Power Deliveries has charged a fixed annual fee for each customer if the customer agreed to give the company all of its overnight delivery business. The annual fee charged to each customer is $3,800.

Required:

1. Is the companys practice of charging a flat fee per customer likely to be contributing to the declining profit? Explain.