Question

Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31: Generators Air Compressors Total Revenue $1,140,040 $2,064,240 $3,204,280 Cost of goods sold 855,030 1,548,180 2,403,210 Gross profit $285,010 $516,060 $801,070 Selling and administrative expenses 178,770 Income from operations $622,300 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as shown below. Activity Activity Base Activity Rate Sales order processing Sales orders $50 per sales order Post-sale customer service Service requests $280 per customer service request The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 337 836 Number of service requests 62 367 a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. Sales Order Processing Activities Cost Post-sale Customer Service Activities Cost Generators $ $ Air Compressors Total $ $ b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. Round percentages to one decimal place. Enter all amounts as positive numbers. Naper Inc. Product Profitability Report For the Year Ended December 31 Generators Air Compressors Total Revenues $ $ $ Cost of goods sold Gross profit $ $ $ Sales order processing $ $ $ Post-sale customer service Total selling and administrative expense $ $ $ Income from operations $ $ $ Gross profit as a percentage of sales % % Income from operations as a percentage of sales % % c. Interpret the product profitability report. The air compressors have the income from operations to sales percentage because the product is a user of Naper’s sales and service activities. Many factors cause the air compressors to have income from operations as a percent of sales than generators.

Answer 1

a.

	Sales Order Processing Activities Cost	Post-sale Customer Service Activities Cost
Generators (337 x $50);(62 x $280)	16850	17360
Air Compressors (836 x $50);(367 x $280)	41800	102760
Total	58650	120120

b.

Naper Inc.
Product Profitability Report
For the Year Ended December 31
	Generators	Air Compressors	Total
Revenues	1140040	2064240	3204280
Cost of goods sold	855030	1548180	2403210
Gross profit	285010	516060	801070
Sales order processing	16850	41800	58650
Post-sale customer service	17360	102760	120120
Total selling and administrative expense	34210	144560	178770
Income from operations	250800	371500	622300
Gross profit as a percentage of sales	25.0%	25.0%
Income from operations as a percentage of sales	22.0%	18.0%

c. The air compressors have the lower income from operations to sales percentage because the product is a higher user of Naper’s sales and service activities. Many factors cause the air compressors to have lower income from operations as a percent of sales than generators.