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 $ 486,000 Product modifications Number of modifications 260,000 Phone calls Number of minutes 92,000 E-mail/electronic communications Number of communications 162,000 $ 1,000,000 Customer Revenue Gross Profit Visit Days Modifications Phone Minutes Electronic Communications A $ 400,000 $ 150,000 15 15 1,030 625 B 500,000 200,000 25 15 1,120 875 C 600,000 230,000 40 40 1,370 1,000 D 1,000,000 420,000 90 60 1,720 2,000 E 1,500,000 590,000 100 70 2,120 2,250 Totals $ 4,000,000 $ 1,590,000 270 200 7,360 6,750 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.

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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. (Round "Profit %" to 2 decimal places.)

	Customer Gross Profit Share of Support Costs Based on Revenue Profit After Support Costs Profit % A $150,000 % B 200,000 % C 230,000 % D 420,000 % E $590,000 % Totals $1,590,000 $401,000 $51,397

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. (Round "Net Profit %" to 2 decimal places.)

	Customer Gross Profit ABC Costs Net Profit After Support Costs Net Profit % A $150,000 % B 200,000 % C 230,000 % D 420,000 % E $590,000 % Totals $1,590,000 $0 $0

Answer 1

Allocation of sales and support cost based on Total Revenue Total Revenue = $4 million Total sales and support cost = $1 million Allocation rate = $0.25 per $ of sales revenue Customer $ Share of Support cost based Gross Profit on revenue Profit after support cost 1,50,000.00 $ 1,00,000.00 $ 50,000.00 2,00,000.00 $ 1,25,000.00 $ 75,000.00 2,30,000.00 $ 1,50,000.00 $ 80,000.00 4,20,000.00 $ 2,50,000.00 $ 1,70,000.00 5,90,000.00 $ 3.75,000.00 $ 2,15,000.00 15,90,000.00 $ 10,00,000.00 $ 5,90,000.00 Profit % 12.50%% 15.00% % 13.33% % 17.00% % 14.33% % D $ $ Allocation of sales and support cost based on Activity Based Costing Calculation of Allocation Rate Activity Cost Driver Sales Visit Sales Visit Days Product Modifications Number of modifications Phone Calls Number of minutes E-mails Number of communications $ 1$ $ Total Cost 4,86,000.00 2,60,000.00 92,000.00 1,62,000.00 10,00,000.00 Number of Activity Cost per Activity 270 $ 1,800.00 200 $ 1,300.00 7360 $ 12.50 6750 $ 24.00 Allocation of costs base on Activity E Sales Visit Product Modifications Phone Calls E-mails $ $ $ $ А ТВ 27,000.00 $ 45,000.00 $ 19,500.00 $ 19,500.00 $ 12,875.00 $ 14,000.00 $ 15,000.00 $ 21,000.00 $ 74,375.00 $ 99,500.00 $ 72,000.00 $ 1,62,000.00 $ 1,80,000.00 52,000.00 $ 78,000.00 $ 91,000.00 17,125.00 $ 21,500.00 $ 26,500.00 24,000.00 $ 48,000.00 $ 54,000.00 1,65,125.00 $ 3,09,500.00 $ 3,51,500.00 Customer TA B $ $ $ Gross Profit 1,50,000.00 2,00,000.00 2,30,000.00 4,20,000.00 5,90,000.00 15,90,000.00 $ $ $ $ $ $ ABC Costs Profit after support cost 74,375.00 $ 75,625.00 99,500.00 $ 1,00,500.00 1,65,125.00 $ 64,875.00 3,09,500.00 $ 1,10,500.00 3,51,500.00 $ 2,38,500.00 10,00,000.00 $ 5,90,000.00 Profit % 18.91%% 20.10% % 10.81% % 11.05% % 15.90%% $ $

Note: Be careful with commas while reading figures.