Exercise 7-5 Product and Customer Profitability Analysis [LO7-4, LO7-5] Thermal

Question

Exercise 7-5 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: Activity Cost Pool Activity Rate Supporting direct labor $ 22 per direct labor-hour Order processing $ 198 per order Custom designing processing $ 262 per custom design Customer service $ 430 per customer 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: Standard Model Custom Design Number of gliders 16 2 Number of orders 2 2 Number of custom designs 0 2 Direct labor-hours per glider 30.50 32.00 Selling price per glider $ 1,725 $ 2,310 Direct materials cost per glider $ 464 $ 578 The company’s direct labor rate is $20 per hour. Required: Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Do not round intermediate calculations.)

Explanation / Answer

Thermal Rising Inc

Computation of customer margin of Big Sky Outfitters using the Activity Based Costing System:

Standard

Custom

Total

Sales

$1,725 x16

$27,600

$2,310 x 2

$4,620

$32,220

Less:

Direct materials

$464 x16

($7,424)

$578 x 2

($1,156)

($8,580)

Direct labor

$30.5 x 20 x16

($9,760)

32 x $20 x2

($1,280)

($11,040)

Custom designing

0

$0

$262 x 2

($524)

($524)

Order processing

$198 x 2

($396)

$198 x 2

($396)

($792)

Support direct labor

$22 x 30.5 x 16

($10,736)

$22 x 32 x2

($1,408)

($12,144)

Customer service

($430)

($430)

Profit(Loss)

($1,146)

($144)

($1,290)

Standard

Custom

Total

Sales

$1,725 x16

$27,600

$2,310 x 2

$4,620

$32,220

Less:

Direct materials

$464 x16

($7,424)

$578 x 2

($1,156)

($8,580)

Direct labor

$30.5 x 20 x16

($9,760)

32 x $20 x2

($1,280)

($11,040)

Custom designing

0

$0

$262 x 2

($524)

($524)

Order processing

$198 x 2

($396)

$198 x 2

($396)

($792)

Support direct labor

$22 x 30.5 x 16

($10,736)

$22 x 32 x2

($1,408)

($12,144)

Customer service

($430)

($430)

Profit(Loss)

($1,146)

($144)

($1,290)

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