Question

Ellie Mosk, CEO of X-Space Industries, decided to expand the company’s product offering beyond the core model rocket business. After investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies were interested in having X-Space develop these drones, and financial results, to date, have been encouraging. Revenue was $4 million, gross margins have been running about 40%, and the customer sales and support costs were $1 million. However, there is a growing concern that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability:

Activity	Cost Driver	Total Cost
Sales visits	Sales visit days	$	489,000
Product modifications	Number of modifications		273,000
Phone calls	Number of minutes		93,300
E-mail/electronic communications	Number of communications		175,000
		$	1,030,300

Customer	Revenue				Gross Profit				Visit Days				Modifications				Phone Minutes				Electronic Communications
A	$	403,000			$	153,000				15				15				1,160				625
B		503,000				203,000				25				15				1,250				875
C		603,000				233,000				40				40				1,500				1,130
D		1,130,000				423,000				90				60				1,850				2,130
E		1,530,000				593,000				100				70				2,250				2,380
Totals	$	4,169,000			$	1,605,000				270				200				8,010				7,140

Required:

1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers.

2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.