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	$	202	per order
Custom design processing	$	270	per custom design
Customer service	$	420	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		15		2
Number of orders		2		2
Number of custom designs		0		2
Direct labor-hours per glider		28.50		33.00
Selling price per glider	$	1,650	$	2,350
Direct materials cost per glider	$	470	$	574

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

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters.

Answer 1

Big Sky Outfitters
Customer Margin—Activity-Based Costing
Particulars	Amount ($)
Sales ($1,650 per standard model glider × 15 standard model gliders + $2,350 per custom designed glider × 2 custom designed gliders)	29,450
Costs:
Direct materials ($470 per standard model glider × 15 standard model gliders + $574 per custom designed glider × 2 custom designed gliders)	8,198
Direct labor ($20 per direct labor-hour × 28.50 direct labor-hours per standard model glider × 15 standard model gliders + $20 per direct labor-hour × 33 direct labor-hours per custom designed glider × 2 custom designed gliders)	9,870
Supporting direct labor ($18 per direct labor-hour × 28.50 direct labor-hours per standard model glider × 15 standard model gliders + $18 per direct labor-hour × 33 direct labor-hours per custom designed glider × 2 custom designed gliders)	8,883
Order processing ($202 per order × 4 orders)	808
Custom design processing ($270 per custom design × 2 custom designs)	540
Customer service ($420 per customer × 1 customer)	420
Customer margin	731