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	$	22	per direct labor-hour
Order processing	$	198	per order
Custom design processing	$	253	per custom design
Customer service	$	422	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		15		2
Number of orders		2		2
Number of custom designs		0		2
Direct labor-hours per glider		28.50		33.00
Selling price per glider	$	1,725	$	2,360
Direct materials cost per glider	$	466	$	584

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.)

Answer 1

Computation of Customer Margin
Particulars	Standard Model	Custom Design	Total
Sales	25875	4720	30595
Less:
Direct Material Cost	6990	1168	8158
Direct Labour Cost	8550	1280	9830
Overheads:
Supporting Direct labour COST	9405	1452	10857
Order Processing	396	396	792
Custom Design Processing	0	506	506
Less: Customer Service Cost			422
Customer Margin			30