Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount Price S60,000 Cost of goods sold Gross profit 28,000 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are: Activity Budgeted Activity Cost Activity Base $51,500 Number of service requests 64,000 Number of bids Customer service Project bidding Engineering support 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Number of service requests Number of bids Number of customer design changes Gough Industries Breen Inc. The Martin Group Total 27 35 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a).
Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount Price S60,000 Cost of goods sold Gross profit 28,000 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are: Activity Budgeted Activity Cost Activity Base $51,500 Number of service requests 64,000 Number of bids Customer service Project bidding Engineering support 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Number of service requests Number of bids Number of customer design changes Gough Industries Breen Inc. The Martin Group Total 27 35 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Solve b
Transcribed Image Text:Arctic Air Inc. manufactures cooling units for commercial
buildings. The price and cost of goods sold for each unit are as
follows:
Category
Per Unit Dollar Amount
S60,000
28,000
Price
Cost of goods sold
Gross profit
32,000
In addition, the company incurs selling and administrative
expenses of $226,250. The company wishes to assign these costs
to its three major customers, Gough Industries, Breen Inc., and
The Martin Group. These expenses are related to three major
nonmanufacturing activities: customer service, project bidding,
and engineering support. The engineering support is in the form
of engineering changes that are placed by the customer to
change the design of a product. The budgeted activity costs and
activity bases associated with these activities are:
Activity
Customer service
Budgeted Activity Cost
Activity Base
$51,500 Number of service requests
Project bidding
Engineering support
64,000 Number of bids
110,500 Number of customer design changes
Total costs
226,000
Activity-base usage and unit volume information for the three
customers is as follows:
Activity
Gough Industries Breen Inc. The Martin Group Total
Number of service requests
Number of bids
Number of customer design changes
35
27
115
177
50
40
95
185
18
35
108
161
Unit volume
30
16
4
50
Instructions
a. Determine the activity rates for each of the three
nonmanufacturing activity pools.
b. Determine the activity costs allocated to the three
customers, using the activity rates in (a).
c. Construct customer profitability reports for the three
customers, dated for the year ended December 31, using the
activity costs in (b). The reports should disclose the gross
profit and income from operations associated with each
customer.
d. Provide recommendations to management on how
operations can be improved based on the profitability
reports in (c).
Expert Solution
Activity Based Costing
Activity-based costing is the process of costing the products or services where the overheads are allocated between the products or services based on each activity used by such product or service.
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