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	$	186	per order
Custom design processing	$	254	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		14		2
Number of orders		1		2
Number of custom designs		0		2
Direct labor-hours per glider		26.50		33.00
Selling price per glider	$	1,725	$	2,360
Direct materials cost per glider	$	462	$	576

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

Answer 1

Big Sky Outfitters
Customer Margin—Activity-Based Costing
Sales (1,725 per standard model glider × 14 standard model gliders + 2,360 per custom designed glider × 2 custom designed gliders)		28,870
Costs:
Direct materials (462 per standard model glider × 14 standard model gliders + 576 per custom designed glider × 2 custom designed gliders)	7,620
Direct labor (18 per direct labor-hour × 26.50 direct labor-hours per standard model glider × 14 standard model gliders + $18 per direct labor-hour × 33 direct labor-hours per custom designed glider × 2 custom designed gliders)	7,866
Supporting direct labor ($18 per direct labor-hour × 26.5 direct labor-hours per standard model glider × 14 standard model gliders + $18 per direct labor-hour × 33 direct labor-hours per custom designed glider ×2 custom designed gliders)	7,866
Order processing ($186 per order × 3 orders)	558
Custom design processing ($254 per custom design × 2 custom designs)	508
Customer service ($426 per customer × 1 customer)	426	24,844
Customer margin		4,026