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 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 $420 per Bid preparation Number of bid requests request $90 per Shipment Number of shipments shipment Support standard Number of standard items $30 per std. items ordered item Support Number of nonstandard $180 per nonstandard items items ordered nonstd. item Assume that the company had the following gross profit information for three representative customers: Customer 1 Customer 2 Customer 3 1 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 Customer Customer 1 2 3 15 40 60 25 55 50 Number of bid 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, 20Y8, 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. Metroid Electric Customer Profitability Report For the Year Ended December 31, 20Y8 Customer 1 Customer 2 Customer 3 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 b. Interpret the report in part (a). The gross profit as a percent of sales indicated that was the least profitable, while was the most profitable. After deducting the activity costs associated with customer service activities, became the least profitable, while as profitable Customer 2. The reason is because consumed much more customer service activities than did the other customers. Apparently, ordered nonstandard products that required specialized bid requests. In addition, shipments, indicating smaller shipments to a customer's location, rather than a few large shipments. became nearly required more