Firstly the answer is Yes, it is possible. The best way may not be by using a mail merge though.

I have some questions for you.

1. Is the customer-specific data entry selections done for lots of customers prior to producing the output letters or are you doing the letter for one customer at a time.

2. Are you converting the result to PDF to send out or keeping the output in Word?

Autonumbers and Cross-References are the names of features that answer your questions about the appendix letters and sentences referring to them.

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Andrew Lockton
Chrysalis Design, Melbourne Australia