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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PROBLEM 12-25 Utilization of a Constrained Resource [LO12-5, L012-6] The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data: Demand Next Year (units) Selling Price per Unit Direct Materials Direct Labor Product Debbie Sarah ........... Mike ............. Sewing kit ........ 50,000 42,000 35,000 40,000 325,000 $13.50 $5.50 $21.00 $10.00 $8.00 $4.30 $1.10 $6.44 $2.00 $3.20 $3.20 $2.00 $5.60 $4.00 $1.60 The following additional information is available: a. The company's plant has a capacity of 130,000 direct labor-hours per year on a single-shift basis. The company's present employees and equipment can produce all five products. b. The direct labor rate of $8 per hour is expected to remain unchanged during the coming year. c. Fixed costs total $520,000 per year. Variable overhead costs are $2 per direct labor-hour. d. All of the company's nonmanufacturing costs are fixed. e. The company's finished goods inventory is negligible and can be ignored. Required: 1. Determine the contribution margin per direct labor-hour expended on each product. 2. Prepare a schedule showing the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. 3. Examine the data you have computed in (1) and (2) above. How would you allocate the 130,000 direct labor-hours of capacity to Walton Toy Company's various products? 4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource? 5. What is the highest price, in terms of a rate per hour, that Walton Toy Company would be will- ing to pay for additional capacity (that is, for added direct labor time)? 6. Assume again that the company does not want to reduce sales of any product. Identify ways in which the company could obtain the additional output.

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