Question

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 $20 per direct labor-hour
Order processing $192 per order
Custom designing processing $255 per custom design
Customer service $428 per customer

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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 11 3
Number of orders 1 3
Number of custom designs 0 3
Direct labor-hours per glider 27.50 33.00
Selling price per glider $1,600 $2,320
Direct materials cost per glider $472 $580

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The company's direct labor rate is $22 per hour.


Required:
Using the company's activity-based costing system, compute the customer margin of Big Sky Outfitters. (Round intermediate calculations and final answer to the nearest whole number. Omit the "$" sign in your response.)

Answer 1

Solution:

Comutation of Total Overhead cost assigned to Customer Big Sky
Activity Cost Pool	Working	Standard	Custom	Total
Supporting Direct Labor	Standard ($20*27.50 hours*11 gliders) Custom ($20*33 hours*3 gliders)	$6,050	$1,980	$8,030
Order processing	Standard ($192*1 order) Custome ($192*3 orders)	$192	$576	$768
Custom design processing	Standard ($255*0 Design) Custome ($255*3 designs)	$0	$765	$765
Customer Service	($428 * 1 Customer)			$428
Total Overhead assigned				$9,991

Computation of Customer Margin of Big Sky
Sales:
Standard ($1600*11)	$17,600
Custom ($2320*3)	$6,960
Total Sales		$24,560
Less: Costs:
Direct Material Cost
Standard ($472*11)	$5,192
Custom ($580*3)	$1,740
		$6,932
Direct Labor cost
Standard ($22*27.50*11)	$6,655
Custom ($22*33*3)	$2,178
		$8,833
Overhead cost assigned		$9,991
Total Costs		$25,756
Customer Margin		-$1,196