Thermal Rising, Inc., makes paragliders for sale through specialty sporting good

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:

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:

The company’s direct labor rate is $22 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.)

Activity Cost Pool Activity Rate Supporting direct labor $ 22 per direct labor-hour Order processing $ 196 per order Custom design processing $ 270 per custom design Customer service $ 430 per customer

Explanation / Answer

Calculation of Customer margin of Big Sky Outfitters:

Statement showing Profit for both product (Amount in $)

Sales (A)

(Selling Price*No. of gliders)

22,100

(1,700*13)

4,780

(2,390*2)

Direct Material Cost

(Material cost per glider*No. of gliders

5,798

(446*13)

1,140

(570*2)

Direct labour Cost

(Labour cost per hour*hours*No. of gliders)

8,437

(22*29.50*13)

1,408

(22*32*2)

196

(196*1)

392

(196*2)

Statement showing customer margin (Amount in $)

Particulars Standard Model Custom Design

Sales (A)

(Selling Price*No. of gliders)

22,100

(1,700*13)

4,780

(2,390*2)

Less: Cost of goods sold

Direct Material Cost

(Material cost per glider*No. of gliders

5,798

(446*13)

1,140

(570*2)

Direct labour Cost

(Labour cost per hour*hours*No. of gliders)

8,437

(22*29.50*13)

1,408

(22*32*2)

Order Processing

196

(196*1)

392

(196*2)

Custom design processing 0 (270*0) 540 (270*2) Total cost (B) 14,431 3,480 Net Profit (A-B) 7,669 1,300

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