Activity-Based Costing and Customer Profitability
Metroid Electric manufactures power distribution equipment for
commercial customers, such as hospitals and manufacturers.
Activity-based costing was used to determine customer
profitability. Customer service activities were assigned to
individual customers, using the following assumed customer service
activities, activity base, and activity rate:
Customer Service Activity | Activity Base | Activity Rate |
Bid preparation | Number of bid requests | $420 per request |
Shipment | Number of shipments | $90 per shipment |
Support standard items | Number of standard items ordered | $30 per std. item |
Support nonstandard items | Number of nonstandard items ordered | $180 per nonstd. item |
Assume that the company had the following gross profit
information for three representative customers:
Customer 1 | Customer 2 | Customer 3 | ||||||
Revenues | $130,000 | $210,000 | $180,000 | |||||
Cost of goods sold | (81,900) | (113,400) | (90,000) | |||||
Gross profit | $48,100 | $96,600 | $90,000 | |||||
Gross profit as a percent of sales | 37% | 46% | 50% |
The administrative records indicated that the activity-base
usage quantities for each customer were as follows:
Activity Base | Customer 1 | Customer 2 | Customer 3 |
Number of bid requests | 15 | 40 | 60 |
Number of shipments | 25 | 55 | 50 |
Number of standard items ordered | 20 | 35 | 52 |
Number of nonstandard items ordered | 6 | 65 | 85 |
a. Prepare a customer profitability report dated for the year ended December 31, 20Y8, showing (1) the operating income after customer service activities, (2) the gross profit as a percent of sales, and (3) the operating income after customer service activities as a percent of sales. Prepare the report with a column for each customer. Round percentages to the nearest whole percent.
Metroid Electric | |||
Customer Profitability Report | |||
For the Year Ended December 31, 20Y8 | |||
Customer 1 | Customer 2 | Customer 3 | |
Revenues | $ | $ | $ |
Cost of goods sold | |||
Gross profit | $ | $ | $ |
Customer service activities: | |||
Bid preparation | $ | $ | $ |
Shipment | |||
Support standard items | |||
Support nonstandard items | |||
Total customer service activities | $ | $ | $ |
Operating income after customer service activities | $ | $ | $ |
Gross profit as a percent of sales | % | % | % |
Operating income after customer service activities as a percent of sales | % | % | % |
b. Interpret the report in part (a).
The gross profit as a percent of sales indicated that Customer 1 was the least profitable, while Customer 2 was the most profitable. After deducting the activity costs associated with customer service activities, Customer 3 became the least profitable, while became nearly as profitable as Customer 2. The reason is because consumed much more customer service activities than did the other customers. Apparently, ordered nonstandard products that required specialized bid requests. In addition, required more shipments, indicating smaller shipments to a customer’s location, rather than a few large shipments.
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as...
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $420 per request Shipment Number of shipments $90 per shipment Support standard items Number of standard items ordered $30 per...
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $420 per request Shipment Number of shipments $90 per shipment Support standard items Number of standard items ordered $30 per...
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $420 per request Shipment Number of shipments $90 per shipment Support standard items Number of standard items ordered $30 per...
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $420 per request Shipment Number of shipments $90 per shipment Support standard items Number of standard items ordered $30 per...
Activity-Based Costing and Customer Profitability Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Bid preparation Shipment Activity Base Activity Rate Number of bid requests $420 per request Number of shipments $90 per shipment Number of standard items ordered $30 per std. item Number...
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