Product and Customer Profitability Analysis [LO7-4, LO7-5] Thermal Rising, Inc.,

Question

Product and Customer Profitability Analysis [LO7-4, LO7-5] Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates: Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months: The company's direct labor rate is $19.50 per hour. Required: Using the company's activity-based costing system, compute the customer margin of Big Sky Outfitters.

Explanation / Answer

Calculation of Customer Margin of Big Sky Outfitters by using Activity Based Costing System. Standard Model Custom Design Total A. Calculation of Sales Value Sales Price Per Glider Amount in $           2,400         1,850 Number of Glider Nos                 20                 3 Sales Value (A) Amount in $        48,000         5,550        53,550 B. Calculation of Cost a) Direct Labour Cost Direct Labour hours Per Glider No. Of Hrs           26.35         28.00 direct Labour Rate Amount in $           19.50         19.50 Direct Labour Cost (a) Amount in $        513.83       546.00     1,059.83 (b) Supporting Direct labour cost Direct Labour hours Per Glider No. Of Hrs           26.35         28.00 Supporitng Direct labour rate Amount in $           26.00         26.00 Supporitng Direct labour cost (b) Amount in $        685.10       728.00     1,413.10 (c ) Order Processing Cost No of Order Nos 1 3 Order Processing Rate Amount in $        284.00       284.00 Order Processing Cost (c ) Amount in $        284.00       852.00     1,136.00 (d ) Custom Design Processing Cost Custom Desing Numbers Nos 0 3 Custom Desing Processing rate Amount in $        186.00       186.00 Custom Desing Processing Cost (d) Amount in $                  -         558.00        558.00 (e) Direct Material Cost Direct Material Cost Amount in $              564             634 Number of Glider Nos                 20                 3 Direct Material Cost (e) Amount in $        11,280         1,902        13,182 Total Cost B= (a)+(b)+(c )+(d) +(e) 12,762.93 4,586.00 17,348.93 Margin before Customer Service Cost (A-B) 35,237.08       964.00 36,201.08 Less:- Customer Service Cost Amount in $ 379.00        379.00 Margin after Customer Service Cost 34,858.08       964.00 35,822.08 *Assume Customer service cost allocate to Standard model only.

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