Question

Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company’s work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

   

     The young founders of the company have become increasingly concerned with the economics of the business—particularly since many competitors have sprung up recently in the local area. To help understand the company’s cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below:

  Activity Cost Pool   Activity Measure        Activity Rate                         
  Animation concept Number of proposals $ 6,700 per proposal
  Animation production Minutes of completed animation $ 8,700 per minute
  Contract administration Number of contracts $ 7,000 per contract

These activity rates include all of the company’s costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs.

     Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below:

  Activity Measure Local Commercials
  Number of proposals 30                
  Minutes of completed animation 12                
  Number of contracts 10                
    The total sales from the 10 contracts for local commercials was $180,000.
Required:
1.

Determine the cost of serving the local commercial market.

      

2.

Prepare a report showing the margin earned serving the local commercial market. (Remember, this company has no direct materials or direct labor costs.)

Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the companys work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies The young founders of the company have become increasingly concerned with the economics of the y since many competitors have sprung up recenty in the local area. To help understand the companys cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is argely responsible for contract administration. The activity cost pools and their activity measures are listed below Activity Cost Pool Animation concept Animation production Contract administration Activity Measure Number of proposals Minutes of completed animation Number of contracts S 8,700 per minute S 7,000 per contract r contractsation 6,700 These activity rates include all of the companys costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accapted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below Measure 30 12 Minutes of completed animation Number of contracts The total sales from the 10 contracts for local commercials was 180,000. Required 1. Determine the cost of serving the local commercial market. 2. Prepare a report showing the margin earned serving the local commercial market. (Remember, this company has no direct materials or direct labor costs.] Costs

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Answer #1

1.

Cost of serving the local commercial market = Animation concept cost + Animation production cost + Contract administration cost

Cost of serving the local commercials market = ($6,700 * 30 proposals) + ($8,700*12 minutes) + ($7,000 * 10 contracts) = $375,400

2.

Profitability analysis

Sales revenue

$ 180,000.00

Costs

Animation concept costs

$ 201,000.00

Animation production costs

$ 104,400.00

Contract administration costs

$ 70,000.00

Total costs

$ 375,400.00

Margin

-$ 195,400.00

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