Question

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

Activity Rates

  Supporting manufacturing

$2

per direct labour-hour

  Order processing

$19

per order

  Customer service

$85

per customer

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 Model

Deluxe Model

  Number of cases

$

190

$

55

  Number of orders

$

5

$

2

  Direct labour-hours per case

$

0.25

$

0.40

  Selling price per case

$

39

$

59

  Direct materials cost per case

$

16

$

19

The company’s direct labour rate is $20 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

Solution:

Computation of Customer Margin - Colby Company
Particulars	Standard	Deluxe	Total
Sales Standard - 190*$39 Deluxe - 55*$59	$7,410.00	$3,245.00	$10,655.00
Costs:
Direct materials Standard - 190*$16 Deluxe - 55*$19	$3,040.00	$1,045.00	$4,085.00
Direct labour Standard - 190*0.25*$20 Deluxe - 55*0.40*$20	$950.00	$440.00	$1,390.00
Supporting manufacturing Standard - 190*0.25*$2 Deluxe - 55*0.40*$2	$95.00	$44.00	$139.00
Order processing Standard - 5*$19 Deluxe - 2*$19	$95.00	$38.00	$133.00
Customer service			$85.00
Customer margin			$4,823.00