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EXERCISE 7-5 Product and Customer Profitability Analysis [LO7-4, L07-5] Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The com- pany 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 ........ Order processing ........ Custom design processing. Customer service ........ $26 per direct labor-hour $284 per order $186 per custom design $379 per customer Management would like an analysis of the profitability of a particular customer, Big Sky Outfit- ters, which has ordered the following products over the last 12 months: Standard Model Custom Design 20 Number of gliders ......... Number of orders Number of custom designs ..... Direct labor-hours per glider ....... Selling price per glider ... Direct materials cost per glider ..... www 26.35 $1,850 28.00 $2,400 $634 $564 The company's direct labor rate is $19.50 per hour. Required: Using the company's activity-based costing system, compute the customer margin of Big Sky Outfitters.

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value: 1.00 points 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 $ 182 per order Custom designing processing $ 268 per custom design Customer service $ 426 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 27.50 34.00 Selling price per glider $ 1,700 $ 2,350 Direct materials cost per glider $ 444 $ 570 The company’s direct labor rate is $22 per hour. Required: Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Do not round intermediate calculations.)

what is the customer margin?

Updraft Systems, Inc., makes paragliders for sale throughspecialty sporting goods stores. The company has a standardparaglider model, but also makes custom-designed paragliders.Management has designed an activity-based costing system with thefollowing activity cost pools and activity rates:

Activity CostPool Activity Rate
Supporting directlabor $ 18 per direct labor-hour
Orderprocessing $ 190 per order
Customdesigning $ 265 per custom design
Customerservice $ 422 per customer

Management would like an analysisof the profitability of a particular customer, Eagle Wings, whichhas ordered the following products over the last 12 months:

Standard
Model		 Custom
Design
Number ofgliders 12 3
Number oforders 2 3
Number of customdesigns 0 3
Direct labor-hoursper glider 26.50 32
Selling price perglider $ 1,725 $ 2,370
Direct materialscost per glider $ 472 $ 568
The company’s direct labor rateis $20 per hour.
Required:

Using the company’s activity-based costing system, compute thecustomer margin of Eagle Wings.(Leave no cells blank - becertain to enter "0" wherever required. Loss amount should beindicated with a minus sign. Do not round intermediatecalculations. Round your final answer to the nearest dollar amount.Omit the "$" sign in your response.)

Customer margin $

PROBLEM 7-19 Second Stage Allocations and Product Margins [LO7-4, L07-5] Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the com- pany also does realistic computer animations for special effects in movies The young founders of the company have become increasingly concerned with the eco- nomics of the business particularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the anima- tion goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below: Activity Cost Pool Activity Measure Activity Rate Animation concept ............. Animation production Contract administration .......... Number of proposals Minutes of completed animation Number of contracts $6,040 per proposal $7,725 per minute $6,800 per contract These activity rates include all of the company's costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs. Preliminary analysis using these activity rates has indicated that the local commercial seg- ment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusu- ally low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below: Local Commercials Activity Measure Number of proposals .... Minutes of completed animation ... Number of contracts .. Doa The total sales from the 10 contracts for local commercials was $180,000. Required: 1. Determine the cost of serving the local commercial market. 2. Prepare a report showing the margin earned serving the local commercial market. (Remem- ber, this company has no direct materials or direct labor costs.) 3. What would you recommend to management concerning the local commercial market?

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