Question

Colby Company makes cases for cell phones of all sizes and types for sale through specialty retailers. The company makes a standard model for the most recent iPhone as well as a deluxe model. Management has designed an ABC system with the following activity cost pools and activity rates for these models: Activity Cost Pool Activity Rates Supporting manufacturing $2 per direct labour-hour Order processing $16 per order Customer service $82 per customer Management would like an analysis of the profitability of a particular customer, Cell City, which has ordered the following products over the last 12 months: Standard Model Deluxe Model Number of cases $ 160 $ 40 Number of orders $ 5 $ 2 Direct labour-hours per case $ 0.25 $ 0.40 Selling price per case $ 36 $ 56 Direct materials cost per case $ 13 $ 16 The company’s direct labour rate is $16 per hour. Required: Using the company’s ABC system, compute the customer margin of Cell City.

Answer 1

Cell city Margin
	Standard	Delux	Total
Sales	$       5,760.00	$       2,240.00	$ 8,000.00
Less: Costs
Direct material	$       2,080.00	$          640.00	$ 2,720.00
Direct labor	$          640.00	$          256.00	$     896.00
Overheads:			$               -
Supporting cost	$             80.00	$             32.00	$     112.00
Order Processing	$             80.00	$             32.00	$     112.00
Customer service			$        82.00
Total Overheads			$     306.00
Total Cost			$ 3,922.00
Customer margin			$ 4,078.00

Customer margin =$ 4,078

	Standard	Delux
Sales	=160*36	=40*56
Less: Costs
Direct material	=160*13	=40*16
Direct labor	=+(0.25*160)*16	=+(0.4*40)*16
Overheads:
Supporting cost	=+(0.25*160)*2	=+(0.4*40)*2
Order Processing	=16*5	=16*2
Customer service	$82 common for both products