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- $188 per order
Custom design processing- $267 per custom design
Customer Service- $426 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:

Number of gliders 10 (standard) 2(custom)
Number of orders 1(standard) 2(custom)
Number of custom designs 0(standard) 2(custom)
Direct labor-hours per glider 26.50(standard) 32(custom)
Selling price per glider $1,700(standard) $2,350(custom)
Direct materials cost per glider $456(standard) $584(custom)

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.

Answer 1

The first step is to compute the overhead cost for each of the products ordered by the customer:
Standard Model
Activity Cost Pool	Activity Rate		Activity		ABC Cost
Supporting direct Labor	$              18	per direct labor-hour	265	direct labor-hours	$                                                               4,770
Order processing	$           188	per order	1	order	$                                                                  188
Custom design processing	$           267	per custom design	0	custom designs	$                                                                      -
Customer service	$           426	per customer		Not applicable
Custom Design
Activity Cost Pool	Activity Rate		Activity		ABC Cost
Supporting direct Labor	$              18	per direct labor-hour	64	direct labor-hours	$                                                               1,152
Order processing	$           188	per order	2	order	$                                                                  376
Custom design processing	$           267	per custom design	2	custom designs	$                                                                  534
Customer service	$           426	per customer		Not applicable
The second step is to compute the product margins for the two products:
Product Profitability Analysis
	Satndard Model		Custom Design
Sales (# of units x SP pu)		$                           17,000		$                       4,700
Costs:
Direct materials ( # of units x cost pu)	$        4,560		$             1,168
Direct labor	4,770		1,152
Supporting Direct labor	4,770		1,152
Order processing	188		376
Custom design processing	-	$                           14,288	534	$                       4,382
Product margin		$                             2,712		$                          318
The final step is to compute the profitability of the customer:
Customer Profitability Analysis
Product margin of orders placed by customer:
Standard model	$        2,712
Custom design	318
Total product margins	$        3,030
Customer service overhead	426
Customer margin	2,604

Number of gliders	10 (standard)	2(custom)
Number of orders	1(standard)	2(custom)
Number of custom designs	0(standard)	2(custom)
Direct labor-hours per glider	26.50(standard)	32(custom)
Selling price per glider	$1,700(standard)	$2,350(custom)
Direct materials cost per glider	$456(standard)	$584(custom)