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	$	18	per direct labor-hour
Order processing	$	196	per order
Custom design processing	$	259	per custom design
Customer service	$	422	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		13		3
Number of orders		1		3
Number of custom designs		0		3
Direct labor-hours per glider		29.50		33.00
Selling price per glider	$	1,650	$	2,360
Direct materials cost per glider	$	474	$	584

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 your intermediate calculations and final answer to the nearest whole dollar amount. Loss amounts should be entered with a minus sign.)

Fogerty Company makes two products—titanium Hubs and Sprockets. Data regarding the two products follow:

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.70	25,000	units
Sprockets	0.30	57,000	units

Additional information about the company follows:

1. Hubs require $29 in direct materials per unit, and Sprockets require $15.

2. The direct labor wage rate is $12 per hour.

3. Hubs require special equipment and are more complex to manufacture than Sprockets.

4. The ABC system has the following activity cost pools:

	Estimated		Activity
Activity Cost Pool (Activity Measure)	Overhead Cost		Hubs	Sprockets	Total
Machine setups (number of setups)	$	26,910	115	92	207
Special processing (machine-hours)	$	111,000	3,700	0	3,700
General factory (organization-sustaining)	$	342,400	NA	NA	NA

Required:

1. Compute the activity rate for each activity cost pool.

2. Determine the unit product cost of each product according to the ABC system.

Answer 1

Statement of Profitability	Standard Model	Custom Design
Selling Price per glider (A)	1650	2360
Less:
Direct Material cost per glider (B)	-474	-584
Direct Labor hours per glider	29.5	33
Labor Rate	22	22
Direct Labor Cost per glider (C )	-649	-726
Contribution per glider (A+B+C)	527	1050
Number of gliders	13	3
Total Contribution (D)	6851	3150
Less:
Ordering Cost ( E)	-196	-588
	(1*196)	(3*196)
Custom designs (F)	0	-777
		(3*259)
Profit (D+E+F)	6655	1785
Profit per unit	512	595
Profit per unit/ Selling Price	31%	25%

1)
Computation of Activity Rate
Activity Pool	Overhead cost	Activity	Activity Rate
Machine set ups	26910	207	130
Special Processing	111000	3700	30
General Factory	342400	0	0
Total	480310
2)
Statement of Cost per unit	Hubs	Sprockets
Direct Material	29	15
Direct Wages	8.4	3.6
Total Cost(A)	37.4	18.6
Machine Setups (B )	14950	11960
	(130*115)	(130*92)
Special Processing (C)	111000	0
	(3700*30)
Total Cost (B+C)	125950	11960
Units	25000	57000
Cost per Unit (D)	5.038	0.209824561
Total Cost per unit (A+D)	42.438	18.80982456