Question

2 parts only

Ellie Mosk, CEO of X-Space Industries, decided to expand the company's product offering beyond the core model rocket business After Investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies were interested in having X-Space develop these drones and financial results, to date, have been encouraging. Revenue was $4 million, gross margins have been running about 40%, and the customer sales and support costs were $1 million. However, there is a growing concern that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability Activity Sales visits Product modifications Phone calls E-mail/electronic communications Cost Driver Sales visit days Number of modifications Number of minutes Number of communications Total Cost 5492,000 276,000 93,600 178,000 $1,839,600 Customer Visit Days Modifications Revenue $ 406,000 506,000 606,000 1,160,000 1,560,000 14,218.000 Gross Profit $ 156,000 206,000 236,000 426,000 596,000 $1,620,000 Phone Minutes 1,190 1.280 1,530 1,000 2,280 5. 160 Electronic Communications 525 375 1. 160 2,160 2.410 7.230 Totals Required: 1 Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers 2 Management felt that because the data revealed some customers require a disproportionate share of sales and support resources activity-based costing should be used to determine customer profitability Use ABC to prepare a customer profitability analysis Complete this question by entering your answers in the tabs below. Required 2

Answer 1

Requirement 1 - allocating sales and support cost based on total revenue
Customer	Gross profit	Share of support cost	Profit after support costs	Profit %
A	156000	99,594	56,406	13.89%
B	206000	1,24,124	81,876	16.18%
C	236000	1,48,654	87,346	14.41%
D	426000	2,84,553	1,41,447	12.19%
E	596000	3,82,675	2,13,325	13.67%
Total	1620000	1039600	580400	13.70%

Requirement 2 - based on activity based costing
Customer	Gross profit	ABC Costs	Net profit after support costs	Net profit %
A	156000	77,071	78,929	19.44%
B	206000	1,02,480	1,03,520	20.46%
C	236000	1,74,198	61,802	10.20%
D	426000	3,21,543	1,04,457	9.00%
E	596000	3,64,308	2,31,692	14.85%
Total	1620000	1039600	580400	13.70%

Working notes

Customer	Revenue	Gross profit	Visit days	Modifications	Phone minutes	Electronic Communications	Total Costs
A	406000	156000	27,333	20,700	13,650	15,387	77,071
B	506000	206000	45,556	20,700	14,682	21,542	1,02,480
C	606000	236000	72,889	55,200	17,550	28,559	1,74,198
D	1160000	426000	1,64,000	82,800	21,565	53,178	3,21,543
E	1560000	596000	1,82,222	96,600	26,153	59,333	3,64,308
Total	4238000	1620000	492000	276000	93600	178000	1039600

Activity based costing - we have allocated the cost on each activity on the activity based variables such as visit days , modifications etc.

While in Requirement 1 - the total cost has been allocated on basis of total revenue and allocated customerwise.

Net profit percentage is with Revenue.