Allocating selling and administrative expenses using activity-based

Cold Zone Mechancial Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

 

Price                                                                                                                        $75,000 per unit

Cost of goods sold                                                                                        60,000

Gross profit                                                                                                         $15,000 per unit

 

 

 

 

 

In addition, the company incurs selling and administrative expenses of $231,880. The company wishes to assign these costs to its three major customers, Good Knowledge University, Hot Shotz Arena, and Break-a-Leg Hospital. 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

 

 

Customer service	$  83,720	Number of service requests
Project bidding	61,360	Number of bids
Engineering support	     86,800	Number of customer design changes

Total costs                                                           $231,880

 

Activity-base usage and unit volume information for the three customers is as  follows:

 

Â	Good Knowledge University	Hot Shotz Arena	Break-a-Leg Hospital	  Total
Number of service requests	60	52	210	322
Number of bids	36	18	50	104
Number of customer design changes	45	30	142	217
Unit volume	22	14	6	42

 

Instructions

4.     Determine the activity rates for each of the three nonmanufacturing activity pools.

5.     Determine the activity costs allocated to the three customers, using the activity rates in (1).

 

6.     Construct customer profitability reports for the three customers, dated for  the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer.

7.     Provide recommendations to management, based on the profitability reports in (3).