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: Activity Cost Pool Supporting direct labor Order processing Custom design processing Customer service Activity Rate $ 18 per direct labor-hour $ 188 per order $ 254 per custom design $ 430 per customer 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: Standard Custom Model Design 11 www 9 9 Number of gliders Number of orders Number of custom designs Direct labor-hours per glider Selling price per glider Direct materials cost per glider 27.50 34.00 $ 1,675 $2,320 $ 472 $ 580 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.) Customer margin

Answer 1

Solution:

Computation of Total Overhead cost assigned to Customer Big Sky
Activity Cost Pool	Working	Standard	Custom	Total
Supporting Direct Labor	Standard ($18*27.50 hours*11 gliders) Custom ($18*34 hours*3 gliders)	$5,445	$1,836	$7,281
Order processing	Standard ($188*1 order) Custom ($188*3 orders)	$188	$564	$752
Custom design processing	Standard ($254*0 Design) Custom ($254*3 designs)	$0	$762	$762
Customer Service	($430 * 1 Customer)			$430
Total Overhead assigned				$9,225

Computation of Customer Margin of Big Sky
Sales:
Standard ($1675*11)	$18,425
Custom ($2320*3)	$6,960
Total Sales		$25,385
Less: Costs:
Direct Material Cost
Standard ($472*11)	$5,192
Custom ($580*3)	$1,740
		$6,932
Direct Labor cost
Standard ($22*27.50*11)	$6,655
Custom ($22*34*3)	$2,244
		$8,899
Overhead cost assigned		$9,225
Total Costs		$25,056
Customer Margin		$329