Question

Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses

Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products—generators and air compressors. The following report was prepared by the controller for Volt-Gear senior marketing management for the year ended December 31:

	Generators		Air Compressors			Total
Revenue	$2,000,000			$1,400,000		$3,400,000
Cost of goods sold	1,400,000			980,000		2,380,000
Gross profit	$600,000			$420,000		$1,020,000
Selling and administrative expenses						353,000
Income from operations						$667,000

The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.

The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows:

Activity	Activity Base			Activity Rate
Sales order processing	Sales orders		$80	per sales order
Post-sale customer service	Service requests		$300	per customer service request

The controller determined the following activity-base usage information about each product:

	Generators		Air Compressors
Number of sales orders	980		1,160
Number of service requests	150		456

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

	Sales Order Processing Activities Cost		Post-sale Customer Service Activities Cost
Generators	$		$
Air Compressors
Total	$		$

b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. Round percentages to two decimal places. Enter all amounts as positive numbers.

Volt-Gear Inc.

Product Profitability Report

For the Year Ended December 31

Answer 1

|a) Activity Cost of Each Product: Post-Sales Customer Service Activity Cost Sales Order Processing Activity Cost Generators (980 orders * $80 per order); (150 Requests* S300 per request) |Air Compressors (1,160 orders* $80 per order) (456 requests $300 per request) Total $45,000 $78,400 $92,800 $136,800 $171,200 $i81,800 b) Product Profitability Report: Volt-Gear Inc., Prouct Profitability Report For the Year Ended December 31 |Air Compressors Total $1.400,000 S3,400,000 $980,000 $2,380,000 S420,000 S1,020,000 Generators Revenue (b) Less: Cost of Goods Sold Gross Profit (a) Less: Selling and Administrative Expenses come from Operations (c) Gross Profit to Sales (a /b * 100) |Income from Operations to Sales (c /b $2,000,000 $1,400,000 $600,000 $171,200 $181,800 $353,000 $428,800 $238,200 $667,000 30% 30% 30% 100) 21% 17% 20%