Question

Exercise 7-7 Product and Customer Profitability Analysis [LO3, LO4] Colby Company makes cases for cell phones of all sizes and types for sale through specialty retailers. The company makes a standard model for the most recent iPhone as well as a deluxe model. Management has designed an ABC system with the following activity cost pools and activity rates for these models Activity Cost Pool Supporting manufacturing Order processing Cus tomer service Activity Rates $2 per direct 1abour-hour $14 per order $80 per custoner Management would like an analysis of the profitability of a particular customer, Cell City, which has ordered the following products over the last 12 months Standard Deluxe Model Model $140 $30 Number of cases Number of orders Direct labour hours per case Selling price per case Direct materials cost per case $ 0. 25$ 0. 40 $34 $54 $11$14 The company's direct labour rate is $14 per hour Required Using the company's ABC system, compute the customer margin of Cell City Sales Costs Direct materials Direct labour Supporting manufacturing Order processing Customer service Customer margin

Answer 1

Computation of customer margin of Cell city

Amount Total Standard Mod Delux Model Sales 6,380 4,760$1,620 Cost: Direct material Direct labour Supporting manufacturing cost $ Order processing cost (1,960) $ 1,540) $ 490) S (658)$ 94 (98) S 420 (168) 24 (28) 70 70 Customer margin before customer ervice Customer service Customer margin 3,570 $ 2,590 980 80 3,490 Working notes Standard Mode Delux Model A Unit sold B Price per unit C Amount of sales (A B) 140 30 34.00 $ 54.00 4,760.00 1,620.00 D Direct material cost per case 11.00 14.00 1,540.00 420.00 E Direct material cost (AFD) F Labour hour per case G labour hour rate per hour H Labour hour rate per case (F*G) 0.25 0.4 14.00 14.00 5.60 490.00 168.00 3.50 Direct labour cost (A*H) J Direct labour Hours (A*F 35 12 Supporting manufacturing cost per K direct labour hour L Supporting manufacturing cost (J*K) 2.00 $ 2.00 $ 70.00 24.00 M Number of orders N order processing per order O order processing cost (MFEN) 14.00 14.00 70.00 28.00