# EXERCISE 7-5 Product and Customer Profitability Analysis [LO7-4, L07-5] Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The com- pany 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 ........ Order processing ........ Custom design processing. Customer service ........ \$26 per direct labor-hour \$284 per order \$186 per custom design \$379 per customer Management would like an analysis of the profitability of a particular customer, Big Sky Outfit- ters, which has ordered the following products over the last 12 months: Standard Model Custom Design 20 Number of gliders ......... Number of orders Number of custom designs ..... Direct labor-hours per glider ....... Selling price per glider ... Direct materials cost per glider ..... www 26.35 \$1,850 28.00 \$2,400 \$634 \$564 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.

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To determine: The customer margin of BS Outfitters using the company’s activity-based costing system.Explanation:Computation of the customer margin of BS Outfitters using the company’s activity-based costing system:BS OutfittersCustomer Margin-Activity Based Costing   Sales  \$ 44,200.00 Costs:  Direct materials \$ 13,182.00  Direct labor \$ 11,914.50  Supporting Direct labor \$ 15,886.00  Order processing \$ 1,136.00  Custom design processing \$ 558.00  Customer service \$ 379.00 \$ 43,055.50 Customer margin  \$ 1,144.50 Working note:
To determine: The customer margin of BS Outfitters using the company’s activity-based
costing system.
Explanation:
Computation of the customer margin of BS Outfitters using the company’s activity-based
costing system:
BS Outfitters
Customer Margin-Activity Based Costing
Sales
\$ 44,200.00
Costs:
Direct materials
\$ 13,182.00
Direct labor
\$ 11,914.50
Supporting Direct labor
\$ 15,886.00
Order processing
\$ 1,136.00
Custom design processing
\$ 558.00
Customer service
\$ 379.00
\$ 43,055.50
Customer margin
\$ 1,144.50
Working note:
( ) ( )
Sales=Sellingpriceof standardmodelgliders
+ Sellingpriceof customdesign gliders
= \$1,850 20 \$2,400 3
\$37,000 \$7,200
\$44,200
 +
=+
=
( ) ( )
Direct materials= Direct materialcost of standardmodelglider
+Direct materialcostof customdesign glider
= \$564 20 \$634 3
\$11,280 \$1,902
\$13,182
 +
=+
=
( ) ( )
Directlabor= Directlaborcostof standardmodelglider
+Directlaborcostof customdesign glider
= \$19.50 26.35 20 \$19.50 28.00 3
\$10,276.5 \$1,638
\$11,914.5
 +
=+
=
( ) ( )
Order processing cost = Order processing cost of standard modelglider
+Order processingcost of customdesign glider
= \$284 1 \$284 3
\$284 \$852
\$1,136
 +
=+
=
( ) ( )
Customdesign processingcost = Customdesign processingcost of standard modelglider
+Customdesign processingcost of customdesign glider
= \$186 0 \$186 3
\$0 \$558
\$558
 +
=+
=
( )
Customerservicecost = Customerservicecostof both gliders
= \$379 1
\$379
=

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