LO 1, 2, 3, 5, 6 6-27 Customer profitability analysis, original activity-based costing Kronecker Company, a growing mail-order clothing and accessory company, is concerned about its growing MSDA expenses. It therefore examined its customer ordering patterns for the past year and identified four different types of customers, as illustrated in the following table. Kronecker sends catalogs and flyers to all its customers several times a year. Orders are taken by mail or over the phone. Kronecker maintains a toll-free number for customers to use when placing orders over the phone. Kronecker prides itself on the personal attention it provides shoppers who order over the phone. 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 received. Customers must pay return shipping charges, but their purchase price is then fully refunded. Initial sales Number of items returned Dollar value of items returned Number of orders per year CUSTOMER TYPE 1 CUSTOMER TYPE 2 CUSTOMER TYPE 3 CUSTOMER TYPE 4 $1,000 $1,000 $2,500 $3,000 0 4 2 0 $200 $500 24 $1,500 1 6 4 12 Number of phone orders per year 1 0 0 12 Time spent on phone placing orders 0.25 hour 0 0 1 hour Number of overnight deliveries 1 0 0 12 Number of regular deliveries 0 0 Prices are set so that cost of goods sold is on average about 75% of the sales price. 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: ACTIVITY Process mail orders Process phone orders Process returns Process overnight delivery requests Maintain customer relations (send catalogs and respond to customer comments or complaints) ACTIVITY COST DRIVER RATE $5 per order $80 per hour $5 per item returned $4 per request $50 per year Required (a) Using activity-based costing, determine the yearly profit associated with each of the four customers described. (b) Comment on which customers are most profitable and why. (c) What advice do you have for Kronecker regarding managing customer relationships with the different types of customers represented?