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	$	16	per direct labor-hour
Order processing	$	202	per order
Custom designing processing	$	269	per custom design
Customer service	$	428	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		3
Number of orders		2		3
Number of custom designs		0		3
Direct labor-hours per glider		27.50		32.00
Selling price per glider	$	1,675	$	2,340
Direct materials cost per glider	$	444	$	578

  

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

  

Required:

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Do not round intermediate calculations.) What is the Customer Margin?

Answer 1

Assigning Overhead Cost to Product Model
Using ABC Method
	Activity Based Overhead Rate		Standard Model			Custom Design
			Cost Driver Incurred		OH Allocated	Cost Driver Incurred		OH Allocated
Supporting direct labor	16.00	per dlh	413	dlh	6,600.00	96	dlh	1,536.00
Order processing	202.00	per order	2	orders	404.00	3	orders	606.00
Custom designing processing	269.00	per custom design	-	custom designs	-	3	custom designs	807.00
Customer service	428.00	per customer	1	customer	428.00	1	customer	428.00
Total Indirect Cost					7,432.00			3,377.00
Calculation of Total Cost - Big Sky Outfitters:
	Standard Model	Custom Design
No. of Gliders	15	3
Direct Materials	6,660.00	1,734
Direct Labor	8,250.00	1,920
Ovrehead Assigned:
Supporting direct labor	6,600.00	1,536.00
Order processing	404.00	606.00
Custom designing processing	-	807.00
Customer service	428.00	428.00
Total Cost	22,342.00	7,031.00
Calculation of Total Margin:
	Standard Model	Custom Design	Total
No. of Gliders	15.00	3.00
SP per Glider	1,675.00	2,340.00
Sales Revenue	25,125.00	7,020.00	32,145.00
Total Cost	22,342.00	7,031.00	29,373.00
Profit Margin	2,783.00	(11.00)	2,772.00