Question

Exercise 7-5 Product and Customer Profitability Analysis [LO7-4, LO7-5]

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	$	22	per direct labor-hour
Order processing	$	194	per order
Custom design processing	$	268	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		11		2
Number of orders		1		2
Number of custom designs		0		2
Direct labor-hours per glider		29.50		34.00
Selling price per glider	$	1,650	$	2,310
Direct materials cost per glider	$	454	$	576

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. (Round your intermediate calculations and final answer to the nearest whole dollar amount. Loss amounts should be entered with a minus sign.)

Customer margin = ????

Answer 1

	Computation of Customer Margin
	Particulars	Standard Model	Custom Design	Total
	Sales	18,150	4,620	22,770
	Less:
	Direct Material Cost	4,994	1,152	6,146
	Direct Labour Cost	6,490	1,360	7,850
	Overheads:
	Supporting Direct labour COST	7,139	1,496	8,635
	Order Processing	194	388	582
	Custom Design Processing	-	536	536
	Less: Customer Service Cost			420
	Customer Margin			(1,399)