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 Sales visits Product modifications Phone calls E-mail/electronic communications Cost Driver Sales visit days Number of modifications Number of minutes Number of communications Total Cost $ 481,000 265, 000 92,500 167, 000 $1,005, 500 Customer А B с D E Totals Revenue $ 395,000 495, 000 595, 000 1,050,000 1, 450,000 $3,985, 000 Gross Profit $ 145,000 195,000 225,000 415, 000 585, 000 $1,565, 000 Visit Days 15 25 40 90 100 270 Modifications 15 15 40 60 70 200 Phone Minutes 1,080 1, 170 1, 420 1, 770 2, 170 7,610 Electronic Communications 625 875 1,050 2,050 2, 300 6, 900

Answer 1

1	Cost allocation based on revenue
	Customer	Gross profit	Share of Support Cost Based on Revenue	Profit After support Costs	Profit %
	A	$ 145000	99666.88	45333.12	11.48	%
	B	195000	124899.00	70101.00	14.16	%
	C	225000	150131.12	74868.88	12.58	%
	D	415000	264937.26	150062.74	14.29	%
	E	585000	365865.75	219134.25	15.11	%
	Totals	$1565000	$1005500	$559500.00
	Allocation Ratio = 395 :495 :595 :1050 : 1450 (based on revenue)
2	Cost allocation based on ABC (Activity Based Costing)
	Customer	Gross profit	ABC costs (working note)	Profit After support Costs	Net profit Profit % (on revenue
	A	$ 145000	$ 74851.50	$ 70148.50	17.76	%
	B	195000	99810.99	95189.01	19.23	%
	C	225000	166932.49	58067.51	9.76	%
	D	415000	310963.73	104036.27	9.91	%
	E	585000	352941.29	232058.71	16.00	%
	Totals	$ 1565000	$ 1005500	$ 559500.00
	Allocation of cost based Activity
	Activity	A	B	C	D	E	Totals
	Sales Visit	$ 26722.2	$ 44537.04	$ 71259.26	$ 160333.33	$ 178148.15	$ 481000
	Product modification	19875	19875	53000	79500	92750	265000
	Phone calls	13127.5	14221.42	17260.18	21514.45	26376.48	92500
	E-mail/electronic communication	15126.8	21177.54	25413.04	49615.94	55666.67	167000
		$ 74851.5	$ 99810.99	$ 166932.49	$ 310963.73	$ 352941.29	$ 1005500

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