Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Price Per Unit Dollar Amount S60,000 Cost of goods sold Gross profit 28,000 32,000 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: Activity Budgeted Activity Cost Activity Base $1,500 Number of service requests Customer service Project bidding Engineering support 64,000 Number of bids 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Gough Industries Breen Inc. The Martin Group Total Activity Number of service requests Number of bids 35 27 115 177 50 18 40 95 185 Number of customer design changes 35 108 161 Unit volume 50 30 16 4 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a). c. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (b). The reports should disclose the gross profit and income from operations associated with each customer. d. Provide recommendations to management on how operations can be improved based on the profitability reports in (c).
Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Price Per Unit Dollar Amount S60,000 Cost of goods sold Gross profit 28,000 32,000 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: Activity Budgeted Activity Cost Activity Base $1,500 Number of service requests Customer service Project bidding Engineering support 64,000 Number of bids 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Gough Industries Breen Inc. The Martin Group Total Activity Number of service requests Number of bids 35 27 115 177 50 18 40 95 185 Number of customer design changes 35 108 161 Unit volume 50 30 16 4 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a). c. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (b). The reports should disclose the gross profit and income from operations associated with each customer. d. Provide recommendations to management on how operations can be improved based on the profitability reports in (c).
Principles of Cost Accounting
17th Edition
ISBN:9781305087408
Author:Edward J. Vanderbeck, Maria R. Mitchell
Publisher:Edward J. Vanderbeck, Maria R. Mitchell
Chapter10: Cost Analysis For Management Decision Making
Section: Chapter Questions
Problem 18E
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Profitability Report:- It is a report which helps in analyzing the company profit earned after deducting all expenses from sales. It helps in calculating the operating profit.
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