Question

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

1	Price per unit	$60,000.00
2	Cost of goods sold	28,000.00
3	Gross profit per unit	$32,000.00

In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are:

1	Activity	Budgeted Activity Cost	Activity Base
2	Customer service	$31,500.00	Number of service requests
3	Project bidding	74,000.00	Number of bids
4	Engineering support	120,750.00	Number of customer design changes
5	Total costs	$226,250.00

Activity-base usage and unit volume information for the three customers is as follows:

	Gough Industries	Breen Inc.	The Martin
			Group	Total
Number of service requests	36	28	116	180
Number of bids	50	40	95	185
Number of customer design changes	18	35	108	161
Unit volume	30	16	4	50

	Required:
1.	Determine the activity rates for each of the three nonmanufacturing activity pools. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries.
2.	Determine the activity costs allocated to the three customers, using the activity rates in (1). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries.
3.	Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Colons (:) will automatically appear if required. Enter all amounts as positive numbers, except for a negative income from operations.

Labels
December 31
For the Year Ended December 31
Selling and administrative activities
Amount Descriptions
Breen Inc.
Cost of goods sold
Customer service
Engineering support
Gough Industries
Gross profit
Income from operations
Other income (expense)
Plantwide factory overhead rate
Product cost distortion
Project bidding
Revenues
The Martin Group
Total selling and administrative activities

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries.

1			per serv. req.
2			per bid
3			per design change

2. Determine the activity costs allocated to the three customers, using the activity rates in (1). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries.

1		Activity Costs
2
3
4

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Colons (:) will automatically appear if required. Enter all amounts as positive numbers, except for a negative income from operations.

Arctic Air Inc.

Customer Profitability Report

1		Gough Industries	Breen Inc.	The Martin Group
2
3
4
5
6
7
8
9
10

Answer 1

1.

1	Customer service	$175	per serv. req.
2	Project bidding	$400	per bid
3	Engineering support	$750	per design change

Working:

Customer service = $31500/180 = $175

Project bidding = $74000/185 = $400

Engineering support = $120750/161 = $750

2.

1		Activity Costs
2	Gough Industries	$39800
3	Breen Inc.	$47150
4	The Martin Group	$139300

Working:

	Activity Rates	Gough Industries		Breen Inc.		The Martin Group
		Activity-base usage	Activity Cost $	Activity-base usage	Activity Cost $	Activity-base usage	Activity Cost $
Customer service	175	36	6300	28	4900	116	20300
Project bidding	400	50	20000	40	16000	95	38000
Engineering support	750	18	13500	35	26250	108	81000
Total Activity Costs $			39800		47150		139300

3.

Arctic Air Inc.
Customer Profitability Report
For the Year Ended December 31
1		Gough Industries	Breen Inc.	The Martin Group
2	Revenues	1800000	960000	240000
3	Cost of goods sold	840000	448000	112000
4	Gross profit	960000	512000	128000
5	Selling and administrative activities
6	Customer service	6300	4900	20300
7	Project bidding	20000	16000	38000
8	Engineering support	13500	26250	81000
9	Total selling and administrative activities	39800	47150	139300
10	Income from operations	920200	464850	-11300