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 ....................... $26 per direct labor-hour

Order processing ................................ $284 per order

Custom design processing ................. $186 per custom design

Customer service ............................... $379 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	20	3
Number of orders	1	3
Number of custom designs	0	3
Direct labor-hours per glider	26.35	28
Selling price per glider	$ 1850	$ 2400
Direct materials cost per glider	$ 564	$ 634

The company’s direct labor rate is $19.50 per hour.

Required:

Using the company’s activity-based costing system, compute the total customer margin.

Answer 1

Standard Model:

Number of gliders = 20

Sales revenue = Selling price per glider * Number of gliders
Sales revenue = $1,850 * 20
Sales revenue = $37,000

Direct materials = Direct materials cost per glider * Number of gliders
Direct materials = $564 * 20
Direct materials = $11,280

Direct labor hours per glider = 26.35

Direct labor hours = Direct labor hours per glider * Number of gliders
Direct labor hours = 26.35 * 20
Direct labor hours = 527

Direct labor = Direct labor rate per hour * Direct labor hours
Direct labor = $19.50 * 527
Direct labor = $10,276.50

Custom Design:

Number of gliders = 3

Sales revenue = Selling price per glider * Number of gliders
Sales revenue = $2,400 * 3
Sales revenue = $7,200

Direct materials = Direct materials cost per glider * Number of gliders
Direct materials = $634 * 3
Direct materials = $1,902

Direct labor hours per glider = 28.00

Direct labor hours = Direct labor hours per glider * Number of gliders
Direct labor hours = 28.00 * 3
Direct labor hours = 84

Direct labor = Direct labor rate per hour * Direct labor hours
Direct labor = $19.50 * 84
Direct labor = $1,638