Question

Exercise 7-5 Product and Customer Profitability Analysis [LO7-4, LO7-5]

Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:

Activity Cost Pool	Activity Rate
Supporting direct labor	$	20	per direct labor-hour
Order processing	$	184	per order
Custom design processing	$	263	per custom design
Customer service	$	430	per customer

Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months:

	Standard Model		Custom Design
Number of gliders		13		3
Number of orders		2		3
Number of custom designs		0		3
Direct labor-hours per glider		27.50		32.00
Selling price per glider	$	1,625	$	2,310
Direct materials cost per glider	$	446	$	580

The company’s direct labor rate is $20 per hour.

Required:

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Round your intermediate calculations and final answer to the nearest whole dollar amount. Loss amounts should be entered with a minus sign.)

Customer margin

?

Answer 1

Customer margin of Big Sky outfitter
			Standard	Custom	Total
Direct material cost		5798	1740	7538
Direct labour cost		7150	1920	9070
Activity cost
Supporting labour @ 20 per DLH	7150	1920	9070
Order processing @ 184 per order	368	552	920
Custom design @ 263 per design	0	789	789
Customer service @ 430 per customer		430
Total cost			20466	6921	27817
Sales revenue		21125	6930	28055
Margin			659	9	238
Total customer margin of Big Sky outfitter: $ 238