4.5 Activity-Based Costing and Customer Profitability

Metroid 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 $420 per request

Shipment Number of shipments $90 per shipment

Support standard items Number of standard items ordered $30 per std. item

Support nonstandard items Number of nonstandard items ordered $180 per nonstd. item

Assume that the company had the following gross profit information for three representative customers:

Customer 1 Customer 2 Customer 3

Revenues $130,000 $210,000 $180,000

Cost of goods sold (81,900) (113,400) (90,000)

Gross profit $48,100 $96,600 $90,000

Gross profit as a percent of sales 37% 46% 50%

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

Activity Base Customer 1 Customer 2 Customer 3

Number of bid requests 15 40 60

Number of shipments 25 55 50

Number of standard items ordered 20 35 52

Number of nonstandard items ordered 6 65 85

Activity-Based Costing and Customer Profitability Metrold 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 ratet Activity Base Activity Rate Customer Service Activity Bid preparation Shipment Support standard items Number of bid requests Number of shipments Number of standard Items ordered Number of nonstandard items ordered $420 per request $90 per shipment $30 per std. item $180 per nonsto item Support nonstandard kems Assume that the company had the following gross profit information for three representative customers: Revenues Cost of goods sold Gross profit Gross profit as a percent of sales Customer 1 Customer 2 Customer 3 $130,000 $210,000 $180,000 (81,900) (113,400) (90,000) $48,100 $96,600 590,000 3796 46% 50% The administrative records indicated that the activity-base usage quantities for each customer were as follows: Activity Base Customer Customer Customer 1 2 15 60 40 55 25 50 Number of bld requests Number of shipments Number of standard Items ordered Number of nonstandard items ordered 20 35 52 6 65 85 a. Prepare a customer profitability report dated for the year ended December 31, 2018, showing (1) the operating income after customer service activities, (2) the gross profit as a percent of sales, and (3) the operating income 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. Metrold Electric Customer Profitability Report For the Year Ended December 31, 20Y8 Customer 1 Customer 2 Customer Revenues Cost of goods sold Gross profit Customer service activities: Bid preparation Shipment Support standard items Support nonstandard items Total customer service activities Operating income after customer service activities Gross profit as a percent of sales Operating income after customer service activities as a percent of sales upo