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	$	22	per direct labor-hour
Order processing	$	188	per order
Custom design processing	$	263	per custom design
Customer service	$	436	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		3
Number of orders		2		3
Number of custom designs		0		3
Direct labor-hours per glider		27.50		31.00
Selling price per glider	$	1,600	$	2,320
Direct materials cost per glider	$	458	$	576

The company’s direct labor rate is $18 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.)

Answer 1

Sol:-

	Calculation of customer margin of B S O using activity -based costing system
	Particulars	Amount ($)	Amount ($)	Amount ($)
	Sales
	Standard( $1,600 Per glider x 10 gliders )	16,000
	Custom ($ 2,320 Per glider x 3 gliders	6,960
	Total Sales (A)			22,960
	Less:-
	Direct Material Cost
	Standard( $458 Per glider x 10 gliders )	4580
	Custom( $576 per glider x 3 glider)	1,728	6,308
	Direct Labor cost
	Standard( $18 Per Hour x 27.50 hours x 10 gliders )	4950
	Custom( $18 per Hour glider x 31 Hours x 3 glider)	1,674	6,624
	Overhead Costs ( Working Note -1 )		10,261
	Total Costs (B)			23,193
	Customer Margin (A) - (B)			-233
	Hence, customer margin of B S O under activity -based costing system is ($ 233).

Working Note:- 1

	Activity Cost pool	Calculation	Standard	Custom	Total
	Supporting Direct Labor	Standard - 27.50 hours x 10 gliders x 22 per direct labor hour      Custom - 31 hours x 3 gliders x $22 per direct labor hour	6,050	2,046	8,096
	Order Processing	Standard -2 orders x 188 per order                                    Custom -3 orders x 188 per order	376	564	940
	Custom Design Processing	Standard - 0 custom design x 263 per custom design Custom - 3 custom design x 263 per custom design	0	789	789
	Custom Service	1 customer x 436			436
	Total Overhead Cost assigned to the Customer	10,261