Question

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 Cost Driver Total Cost Sales visits Sales visit days $ 476,000 Product modifications Number of modifications 270,000 Phone calls Number of minutes 93,000 E-mail/electronic communications Number of communications 172,000 $ 1,011,000 Customer Revenue Gross Profit Visit Days Modifications Phone Minutes Electronic Communications A $ 390,000 $ 140,000 15 15 1,130 625 B 490,000 190,000 25 15 1,220 875 C 590,000 220,000 40 40 1,470 1,100 D 1,100,000 410,000 90 60 1,820 2,100 E 1,400,000 580,000 100 70 2,220 2,350 Totals $ 3,970,000 $ 1,540,000 270 200 7,860 7,050 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.

Answer 1

Answer with working notes is given below

1 Customer profitability analysis B D $390,000 $140,000 $490,000 $190,000 с $590,000 $220,000 $1,100,000 $410,000 E $1,400,000 $580,000 Total $3,970,000 B $1,540.000 Sales Gross profit Less: Sales and Support cost allocation (Ratio of Total Sales) * Customer profitability Customer wise return on sales $99,317 $40,683 10.4% $124,783 $65,217 13.3% $150,249 $69,751 11.8% $280,126 $129,874 11.8% $356,524 $223,476 16.0% $1,011,000 $529,000 A 13.3% A/B * Total Sales and Support cost/Total Sales X Customer wise Sales 2 Customer profitability analysis based on ABC A $390,000 $140,000 В 1 $490,000 $190,000 с $590,000 $220,000 $1,100,000 $410,000 $1,400,000 $580,000 Total $3,970,000 B $1,540,000 Sales Gross profit Less: Sales and Support cost allocation Sales visits Product modifications Phone calls E-mail/electronic communications Total Sales and Support Cost Customer profitability Customer wise return on sales $26,444 $20,250 $13,370 $15,248 $75,3131 $64,687 16.6% $44,074 $20,250 $14,435 $21,348 $100,107 $89,893 18.3% $70,519 $54,000 $17,393 $26,837 $168,749 $51,251 8.7% $158,667 $81,000 $21,534 $51,234 $312,435 $97,565 8.9% $176,296 $94,500 $26,267 $57,333 $354,397 $225,603 16.1% $476,000 $270,000 $93,000 $172,000 $1,011,000 $529,000 A 13.3% A/B Working note: Activities consumed Customer wise 100 Total Activities 270 200 7,860 7,050 15 15 Visit Days Modifications Phone Minutes Electronic Communications 70 1,130 625 1,220 875 1,470 1,100 1,820 2,100 2,220 2.350 Sales visits Product modifications Phone calls E-mail/electronic communications Total Sales and support costs Total cost $476,000 $270,000 $93,000 $172,000 $1,011,000 Total activities 270 200 7,860 7,050 Cost per activity $1,762.96 Per Sale visit $1,350.00 per product modification $11.83 per phone call $24.40 per e-mail/electronic communication в $44,074 Support cost allocation based on Activities consumed Activities consumed * Activity Cost Rate A Visit Days $26,444 Modifications $20,250 Phone Minutes $13,370 Electronic Communications $15,248 Total Sales and support costs $75,313 $20,250 C $70,519 $54,000 $17,393 $26,837 $168,749 D $158,667 $81,000 $21,534 $51,234 $312,435 E $176,296 $94,500 $26,267 $57,333 $354,397 Total Cost $476,000 $270,000 $93,000 $172,000 $1,011,000 $14,435 $21,348 $100,107