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	$	261	per custom design
Customer service	$	424	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		14		2
Number of orders		1		2
Number of custom designs		0		2
Direct labor-hours per glider		29.50		33.00
Selling price per glider	$	1,750	$	2,390
Direct materials cost per glider	$	470	$	572

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

Answer 1

Answer:

Activity Rates

Overheads allocated to Standard Model and Custom design

Since,Big Sky Outfitters is the only customer given here for both of the products we considered them as a customer to both the products.

Profitability Analysis

The custom Design has lower profitabilty than the Standard model.