Question

Colby Company makes cases for cell phones of all sizes and types for sale through specialty retailers. The company makes a standard model for the most recent iPhone as well as a deluxe model. Management has designed an ABC system with the following activity cost pools and activity rates for these models:

Activity Cost Pool	Activity Rates
Supporting manufacturing	$	2	per direct labour-hour
Order processing	$	21	per order
Customer service	$	75	per customer

Management would like an analysis of the profitability of a particular customer, Cell City, which has ordered the following products over the last 12 months:

	Standard Model			Deluxe Model
Number of cases	$	160		$	35
Number of orders	$	5		$	2
Direct labour-hours per case	$	0.25		$	0.40
Selling price per case	$	40		$	65
Direct materials cost per case	$	12		$	15

The company’s direct labour rate is $24 per hour.

Required:

Using the company’s ABC system, compute the customer margin of Cell City.

Answer 1

Answer-

CUSTOMER MARGIN FOR CELL CITY
PARTICULARS	STANDARD MODEL	DELUXE MODEL
	$	$
Sales (a)	160 cases*$40 per case =$6400	35 cases*$65 per case =$2275
Less- Costs
Direct Materials cost	160 cases*$12 per case =$1920	35 cases*$15 per case =$525
Direct labor costs	(160 cases*0.25 hours per case)*$24 per hour= $960	(35 cases*0.40 hours per case)*$24 per hour= $336
Supporting manufacturing costs	(160 cases*0.25 hours per case)*$2 per hour= $80	(35 cases*0.25 hours per case)*$2 per hour= $17.50
Order processing	$21 per order*5 orders =$105	$21 per order*2 orders =$42
Customer service	$75 per customer*1 =$75	$75 per customer*1 =$75
Total costs (b)	3140	995.5
Customer margin (c=a-b)	3260	1279.5