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	$	186	per order
Custom designing processing	$	265	per custom design
Customer service	$	428	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		10		2
Number of orders		1		2
Number of custom designs		0		2
Direct labor-hours per glider		28.50		32.00
Selling price per glider	$	1,600	$	2,350
Direct materials cost per glider	$	480	$	566

  

The company’s direct labor rate is $20 per hour.

  

Required:

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Do not round intermediate calculations.)

Answer 1

Customer margin
	Standard	Custom	Total
Sales Revenue	$ 16,000.00	$    4,700.00	$ 20,700.00
Costs
Direct Material	$     4,800.00	$    1,132.00	$    5,932.00
Direct labor	$     5,700.00	$    1,280.00	$    6,980.00
Overheads
Supporting dircet labor	$     5,130.00	$    1,152.00	$    6,282.00
Order processing	$        186.00	$       372.00	$        558.00
Customer Designing procession	$                  -	$       530.00	$        530.00
Customer service			$        428.00
Total Overheads			$    7,798.00
Total Costs			$ 20,710.00
Customer margin			$        (10.00)

Customer service cost is common cost and hence shown in total column only.

All costs and revenues are calculated for total glinders. 10 for standard and 2 for custom.

Standard and Custom columns are made for explanatory purpose only

Customer margin
	Total
Sales Revenue	$ 20,700.00
Costs
Direct Material	$    5,932.00
Direct labor	$    6,980.00
Overheads
Supporting direct labor	$    6,282.00
Order processing	$        558.00
Customer Designing procession	$        530.00
Customer service	$        428.00
Total Overheads	$    7,798.00
Total Costs	$ 20,710.00
Customer margin	$        (10.00)

Customer margin = -$10