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	Activity Rate
Supporting direct labor	$	18	per direct labor-hour
Order processing	$	188	per order
Custom design processing	$	258	per custom design
Customer service	$	432	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 Model		Custom Design
Number of gliders		14		2
Number of orders		2		2
Number of custom designs		0		2
Direct labor-hours per glider		27.50		32.00
Selling price per glider	$	1,600	$	2,400
Direct materials cost per glider	$	446	$	574

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.

Answer 1

Thermal Rising, Inc.

Customer margin - Activity-based costing

Sales [($1,600 * 14 gliders) + ($2,400 * 2 gliders)]		$27,200
Less costs:
Direct material [($446 * 14 gliders) + ($574 * 2 gliders)]	$7,392
Direct labor [(27.50 hrs * 14 gliders * $20) + (32 hrs * 2 gliders * $20)]	8,980
Supporting direct labor [(27.50 hrs * 14 gliders * $18) + (32 hrs * 2 gliders * $18)]	8,082
Order processing [(2 orders * $188) + (2 orders * $188)]	752
Custom design processing ($258 * 2 custom designs)	516
Customer service ($432 * 1 customer)	432	26,154
Customer margin		$1,046