Question

Activity-Based Costing and Customer Profitability

Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate:

Customer Service Activity	Activity Base	Activity Rate
Bid preparation	Number of bid requests	$420 per request
Shipment	Number of shipments	$90 per shipment
Support standard items	Number of standard items ordered	$30 per std. item
Support nonstandard items	Number of nonstandard items ordered	$180 per nonstd. item

Assume that the company had the following gross profit information for three representative customers:

	Customer 1			Customer 2			Customer 3
Revenues		$130,000			$210,000			$180,000
Cost of goods sold		(81,900)			(113,400)			(90,000)
Gross profit		$48,100			$96,600			$90,000
Gross profit as a percent of sales		37%			46%			50%

The administrative records indicated that the activity-base usage quantities for each customer were as follows:

Activity Base	Customer 1	Customer 2	Customer 3
Number of bid requests	15	40	60
Number of shipments	25	55	50
Number of standard items ordered	20	35	52
Number of nonstandard items ordered	6	65	85

a. Prepare a customer profitability report dated for the year ended December 31, 20Y8, showing (1) the operating income after customer service activities, (2) the gross profit as a percent of sales, and (3) the operating income after customer service activities as a percent of sales. Prepare the report with a column for each customer. Round percentages to the nearest whole percent.

Metroid Electric
Customer Profitability Report
For the Year Ended December 31, 20Y8
	Customer 1	Customer 2	Customer 3
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Customer service activities:
Bid preparation	$	$	$
Shipment
Support standard items
Support nonstandard items
Total customer service activities	$	$	$
Operating income after customer service activities	$	$	$
Gross profit as a percent of sales	%	%	%
Operating income after customer service activities as a percent of sales	%	%	%

Answer 1

Answer-

METROID ELECTRIC
CUSTOMER PROFITABILITY REPORT
FOR THE YEAR ENDED DECEMBER 31,20Y8
PARTICULARS	CUSTOMER 1	CUSTOMER 2	CUSTOMER 3
	$	$	$
Revenues (a)	130000	210000	180000
Less- Cost pf goods sold	81900	113400	90000
Gross profit	48100	96600	90000
Less- Customers service activities
Bid preparation	$420 per request*15 requests =6300	$420 per request*40 requests =16800	$420 per request*60 requests =25200
Shipment	$90 per shipment*25 shipments =2250	$90 per shipment*55 shipments =4950	$90 per shipment*50 shipments =4500
Support standard items	$30 per std. Item*20 items =600	$30 per std. Item*35 items =1050	$30 per std. Item*52 items =1560
Support nonstandard items	$180 per non std. Item*6 items =1080	$180 per non std. Item*65 items =11700	$180 per non std. Item*85 items =15300
Total customer service activities	10230	34500	46560
Operating income after customer service activities (b)	37870	62100	43440
Gross profit as a percent of sales	37%	46%	50%
Operating income after customer service activities as a percent of sales (c=a/b)	29%	30%	24%