Question

Exercise 3D: Product and customer profitability analysis (Value: 10 points) LMN Excercise, Inc. manufactures portable infrared saunas. It markets and sells them to gyms and spas who in turn sell them to their individual clients. The company has a generic model but also makes models to customer specifications, especially for gyms. The cost actifities and their respective rates in the company's activity costing system are as follows: Cost Activity Activity Rate Design with customer specifications $287 per each design Order Procesing $211 per order Customer Service $470 per client Direct support labor $19.80 per-labor hour Management asked you for a profitability analysis for customer Z. You have been provided the following information regarding this customer's orders in the past 12 months. Generic model Number of Saunas Order quantity Number of designs with specification Direct labor for each sauna Sale price per sauna Cost of materials per sauna 10 2 0 31 hours $1,815 $508 Model with specifications 4 1 4 35 hours $2,530 $634 Required: Calculate the margin or profitability of customer Z.

Direct labor rate: $ 21 per hour

Answer 1

Total Material cost:
Generic (10 units @508)		5080
Model with specifications (4 units @ 634)	2536
Total Material cost:			7616
Total Labour cost:
Generic (31*10 hours @ 21)		6,510
Model with specification(35*4 hours @21)	2940
Total Labour cost:			9,450
Overheads allocated
Activity			Rate	GENERIC	Model with Spec.	Total
				Driver	OH cost	Driver	OH cost	Overheads
Design with customer spec.	287	0	0	4	1148	1148
Order Processing		211	2	422	1	211	633
Direct Support Labour	19.8	310	6138	140	2772	8910
			Total Overheads				10691
			add: Customer support service (1 customer @ 470)	470
			Total Overheads				11161
Customer Margin of Z:
Sales revenue (10 units @ 1815 + 4 units @ 2530)	28270
Less: Cost
Material				7616
Labour				9450
Overheads			11161
Total cost					28227
Customer Margin of Z:			43
Answer is $ 43.00