a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.
Construct and interpret a product profitability report, allocating selling and administrative expenses
Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31:
| Line Item Description | Generators | Air Compressors | Total |
|---|---|---|---|
| Revenue | $4,200,000 | $3,000,000 | $7,200,000 |
| Cost of goods sold | (2,940,000) | (2,100,000) | (5,040,000) |
| Gross profit | $1,260,000 | $900,000 | $2,160,000 |
| Selling and administrative expenses | (610,000) | ||
| Operating income | $1,550,000 |
The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.
The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows:
| Activity | Activity Base | Activity Rate |
|---|---|---|
| Sales order processing | Sales orders | $65 per sales order |
| Post-sale customer service | Service requests | $200 per customer service request |
The controller determined the following activity-base usage information about each product:
| Line Item Description | Generators | Air Compressors |
|---|---|---|
| Number of sales orders | 3,000 | 4,000 |
| Number of service requests | 225 | 550 |
Question Content Area
a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.
| Line Item Description | Sales Order Processing Activities Cost |
Post-sale Customer Service Activities Cost |
|---|---|---|
| Generators | ||
| Air Compressors | ||
| Total |
Question Content Area
b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Compute the gross profit to sales and the operating income to sales percentages for each product. Round percentages to two decimal places. Enter all amounts as positive numbers.
| Description | Generators | Air Compressors | Total |
|---|---|---|---|
| Revenues | |||
| Cost of goods sold | |||
| Gross profit | |||
| Selling and administrative expenses: | |||
| Sales order processing | |||
| Post-sale customer service | |||
| Total selling and administrative expense | |||
| Operating income | |||
| Gross profit as a percentage of sales | |||
| Operating income as a percentage of sales |
Question Content Area
c. Interpret the product profitability report.
The air compressors have the fill in the blank 1 of 3
income from operations to sales percentage because the product is a fill in the blank 2 of 3
user of Naper’s sales and service activities. Many factors cause the air compressors to have fill in the blank 3 of 3
income from operations as a percent of sales than generators.
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