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	$	20	per direct labor-hour
Order processing	$	190	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:

	Standard Model		Custom Design
Number of gliders		11		2
Number of orders		2		2
Number of custom designs		0		2
Direct labor-hours per glider		28.50		32.00
Selling price per glider	$	1,625	$	2,320
Direct materials cost per glider	$	452	$	572

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

Solution:

Comutation of Total Overhead cost assigned to Customer Big Sky
Activity Cost Pool	Working	Standard	Custom	Total
Supporting Direct Labor	Standard ($20*28.50 hours*11 gliders) Custom ($20*32 hours*2 gliders)	$6,270	$1,280	$7,550
Order processing	Standard ($190*2 order) Custom ($190*2 orders)	$380	$380	$760
Custom design processing	Standard ($267*0 Design) Custom ($267*2 designs)	$0	$534	$534
Customer Service	($426 * 1 Customer)			$426
Total Overhead assigned	$9,270

Computation of Customer Margin of Big Sky
Sales:
Standard ($1625*11)	$17,875
Custom ($2320*2)	$4,640
Total Sales		$22,515
Less: Costs:
Direct Material Cost
Standard ($452*11)	$4,972
Custom ($572*2)	$1,144
		$6,116
Direct Labor cost
Standard ($18*28.50*11)	$5,643
Custom ($18*31*2)	$1,152
		$6,795
Overhead cost assigned		$9,270
Total Costs		$22,181
Customer Margin		$334