Brent Company\'s cost system assigns MSDA expenses to customers using a rate of

Question

Brent Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue. The new CFO has discovered that Brent's customers differ greatly in their ordering patterns and interaction with Brent's sales force. Because the CFO believes Brent's cost system does not accurately assign MSDA expenses to customers, he developed an ABC system and gathered the following information.

Using the activity-based costing information provided, determine the operating profit associated with Austin and with Brooke.

Austin Brooke Totals Sales $ 860,000 $ 700,000 $ 1,560,000 Cost of Goods Sold 440,000 310,000 750,000 Sales Representative Travel 1 8,000 84,000 92,000 Service Customers 30,000 220,000 250,000 Handle Customer Orders 2,000 24,000 26,000 Ship to Customers 48,000 144,000 192,000

Explanation / Answer

Answer:

Particulars Austin Brooke Sales 860000 700000 Cost of goods sold 440000 310000 Gross margin 420000 390000 Marketing, selling, distribution, and administrative expenses Sales representative travel 8000 84000 Service customer 30000 220000 Handle customer orders 2000 24000 Ship to customers 48000 144000 Total activity expenses 88000 472000 Operating profit 332000 -82000 Operating profit/Sales 38.60% -11.71%

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