Simko Company, a growing mail-order clothing and accessory company, is concerned about its growing marketing, selling, distribution and administrative (MSDA) expenses. It therefore examined its customers ordering patterns for the past year and identified four different types of customers, as illustrated in Table "A" below. Simko sends catalogs and flyers to all its customers several times a year. Orders are taken by mail or over the phone. Simko maintains a toll-free number for customers to use when placing orders over the phone. Simko prides itself on the personal attention it provides shoppers who order over the phone.All purchases are paid for by cheque or credit card. Simko 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.

TABLE A

	Customer Type 1	Customer Type 2	Customer Type 3	Customer Type 4
Initial sales	$1,000	$1,000	$2,500	$3,000
Number of items returned	0	4	2	24
Dollar value of items returned	0	$200	$500	$1,500
Number of orders per year	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	6	4	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. Simko has developed the following activity cost driver rates for its support costs:

TABLE B

Activity	Activity Cost Driver Rate
Process mail orders	$5 per order
Process phone orders	$80 per hour
Process returns	$5 per item returned
Process overnight delivery requests	$4 per request
Maintain customer relations (send catalogs and respond to customer comments or complaints)	$50 per year

Required:

1. Using activity-based costing, determine the yearly profit associated with each of the four customers described.

1. Comment on which customers are most profitable and why.

1. What advice do you have for Simko regarding managing customer relationships with the different types of customers represented?