Activity-based  costing  and  customer profitability

chneider Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity    rate:

 

Customer Service Activity                                             Activity Base                                                                    Activity Rate

 

 

 

 

Bid preparation Number of bid requests $200/request Shipment Number of shipments $16/shipment Support standard items Number of standard items ordered $20/std. item Support nonstandard items Number of nonstandard items ordered $75/nonstd. item   Â

 

 

 

 

Assume that the company had the following gross profit information for three representa- tive customers:

 

Â	Customer 1	Customer 2	Customer 3
Revenue	$39,000	$26,000	$31,200
Cost of goods sold	   24,180	   13,520	   15,600
Gross profit	$14,820	$12,480	$15,600
Gross profit as a percent of sales	         38%	        48%	         50%

 

The administrative records indicated that the activity-base usage quantities for each cus- tomer were as  follows:

 

Activity Base	Customer 1	Customer 2	Customer 3
Number of bid requests	12	8	25
Number of shipments	16	24	45
Number of standard items ordered	48	38	56
Number of nonstandard items  ordered	18	30	54

a.    Prepare a customer profitability report dated for the year ended December 31, 2016, showing (1) the income from operations after customer service activities, (2) the gross profit as a percent of sales, and (3) the income from operations after customer service activities as a percent of sales. Prepare the report with a column for each customer. Round percentages to the nearest whole percent.

b.                              Interpret the report in part (a).