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 $ 16 per direct labor-hour $ 200 per order $ 264 per custom design $ 428 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 2 1 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 $1,625 $ 446 33.00 $2,310 $ 566 The company's direct labor rate is $20 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 $ 3,109

Answer 1

Firstly we need to calculate total cost and revenue for which is shown as follows:- (Amounts in $)

Activity cost pools	Standard Model	Custom Design	Total
Supporting direct labor	4,840 (11 gliders*27.50 hrs*$16)	1,056 (2 gliders*33.00 hrs*$16)	5,896
Order processing	200 (1*$200)	400 (2*$200)	600
Custom design processing	0	528 (2*$264)	528
Customer Service	(as there is only one customer)		428
Total Activity cost			7,452
Direct material cost	4,906 ($446*11 gliders)	1,132 ($566*2 gliders)	6,038
Direct labor cost	6,050 (11 gliders*27.50 hrs*$20)	1,320 (2 gliders*33.00 hrs*$20)	7,370
Sales Revenue	17,875 (11 gliders*$1,625)	4,620 (2 gliders*$2,310)	22,495

Calculation of Customer margin of Big Sky Outfitters (Amounts in $)

Sales Revenue (A)	22,495
Costs:
Direct Materials cost	6,038
Direct labor cost	7,370
Supporting direct labor cost	5,896
Order processing cost	600
Custom design processing cost	528
Customer Service cost	428
Total costs (B)	20,860
Customer Margin (A-B)	1,635

Therefore the customer margin of Big Sky Outfitters is $1,635.