Ellie Mosk, CEO of X-Space Industries, decided to expand the company€™s product offering beyond the core model rocket business. After investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies were interested in having X-Space develop these drones, and financial results, to date, have been encouraging. Revenue was $4 million, gross margins have been running about 40%, and the customer sales and support costs were $1 million. However, there is a growing concern that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability:

Required

1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers.

2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis.

3. Compare the results from requirements 1 and 2 above. What are some strategic implications for management?

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Cost Driver Activity Sales visits Product modifications Phone calls E-mail/Electronic communications Total Cost Sales visit days Number of modifications Number of minutes Number of communications $ 486,000 260,000 92,000 162,000 $1,000,000 Phone Electronic Revenue Gross Profit Visit Days Modifications Minutes Communications 15 15 40 Customer $ 400,000 $ 150,000 25 40 625 875 1,000 15 1,030 1,120 1,370 1,720 2,120 7,360 200,000 230,000 500,000 1,000,000 1,500,000 90 100 270 60 2,000 2,250 6,750 590,000 70 Totals $4,000,000 $1,590,000 200