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 $ 493,000 277,000 93,700 179,000 $1,042,700 Customer Visit Days ƠI Una UI Revenue $ 407,000 507,000 607,000 1,170,000 1,570,000 $4,261,000 o Gross Profit $ 157,000 207,000 237,000 427,000 597,000 $1,625,000 Phone Electronic Modifications Minutes Communications 1,200 625 1,290 875 1,540 1,170 60 1,890 2,170 2,290 2,420 200 8,210 7,260 40 100 70 Totals 270 Required: 1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers. 2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis.

Answer 1

1. overhead lost on the basis Allocation of of Revenue Overhead rate a Total ouer head Total Revenule 1,042, 700 44, 261, 00D $ 0.2447 per dollar of sellence Share Super After Support Costo Gross pro mer (A) Profit cost based on Cost - Revenue (0.2447x Rever CA-B (B) Profit D- % Reuer | 11 157000 99596•08 57403.92 T oyo 20700011244066.8682933. 4 16.36% 23700D 148537-6488 462 36 14.57% D 427000 286308.14 140691-86 1202.06 E 597000. 386191.272.2809.73 13.55 % TOTAL 16 25000 104270058230013-67-.

Using Activity based costing. Sales Vista sale Sales Visit lost Sales vitit days 493,000 270 2 $825.9259 pey Sales visit. Similarly, Product modification rate $ 1385 per modification Phone call rates $11.4129 per minute $150 Email Electronic communication rate er $ 24.6556 per communication i ost B C D E Visit modification Phone cau Communication Tot hop Total Support Cost LOSE 27398.8920775 13695-4915404.78 77269.16 45648:1520775 14722-66 21573-69 102719.5 73037.04 5540017575-88, 28847 || 144860.03 164333.33 83100 2157004 53502-75 322506.48 182592.591 90950. 26135.57 59 666.67 36534 4.83 493000.277000 93700 179000 1042700

as a % of quence Costomers Gross Profit ABL costs Net profit often Support Lost Net profit 157,000 77269.16 7.9730 8419.590 207,000 | 104280.5 20.57% 2370DD 174860.0362139.97. 10.23% 427000 322506 48 104493-528°930. 597000. 365344.83 231655.174.76 10. TOTAL 11625 000 1042700 | 582300 13: 67%.

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