After attending a seminar on measuring customer profitability, Mason Ford decide

Question

After attending a seminar on measuring customer profitability, Mason Ford decided to examine Olson Optics' customers to determine if the company truly knew how profitable its customers were. Olson Optics already uses an activity-based costing system to determine the product cost of its two products: RF30 and LF45. Each RF30 sells for $15.00 and requires $3.50 in direct materials and $3.50 in direct labor. Each LF45 sells for $50.00 and requires $14.50 in direct materials and $13.50 in direct labor. The following table provides cost and activity information for manufacturing overhead for the two products. Based on what Ford learned at the seminar, he has gathered the following information about customer support activities. Ford wants to apply his new profitability analysis techniques to Infrared Technologies, a company he believes is representative of Olson's average customer. Information about Infrared's account activity is as follows. Calculate the activity-based product cost for RF30 and LF45. (Round answers to 2 decimal places, e.g. 15.25.) Calculate the cost pool rates for Olson's customer service activities. Calculate the gross profit, customer net profit, and customer profit margin for Infrared Technologies. (Round customer profit margin to 2 decimal places, e.g. 15.25% and other answers to 0 decimal places, e.g. 125.)

Explanation / Answer

Total Cost Total Activity Activity Rate (A) (B) (A) ÷ (B) Packing $      1,57,800          7,89,000 cartons $             0.20 per carton Setup $      3,70,000             37,000 setup hours $           10.00 per setup hour Assembly $      3,50,000          3,50,000 spot welds $             1.00 per spot weld Finishing $      1,96,000             98,000 machine hours $             2.00 per machine hour Activity Volume Allocated Overhead Activity Volume Allocated Overhead Packing          4,99,000 $         99,800          2,90,000 $         58,000 Setup             10,000 $      1,00,000             27,000 $      2,70,000 Assembly          1,20,000 $      1,20,000          2,30,000 $      2,30,000 Finishing             24,000 $         48,000             74,000 $      1,48,000 Total $      3,67,800 $      7,06,000 ÷ units produced          6,00,000          2,00,000 Unit overhead cost $             0.61 $             3.53 RF30 LF45 Direct material $             6.50 $           14.50 Direct labor                  3.50               13.50 Manufacturing overhead (above)                  0.61                  3.53 Total unit cost $           10.61 $           31.53 Total Cost Total Activity Cost Driver Activity Rate (A) (B) (A) ÷ (B) Order entry $1,40,000 35,000 Orders 4 Customer support $1,26,000 4,500 Support hours 28 Sales calls $1,80,000 1,500 Sales calls 120 Express shipping $1,17,000 6,500 Shipments 18 Sales Revenue (10000*15.)+(2500*50) 275000 Product Cost (10000*10.61.)+(2500*31.53)          1,84,925 Gross Profit             90,075 Order entry 4 *290 1160 Customer support 28*490 13720 Sales calls 120*22 2640 Express shipping 18*240 4320 Net profit             68,235 Margin 68235/275000 24.81%

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