Allocating Selling and Administrative Expenses using Activity-Based Costing

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

Price	$60,000	per unit
Cost of goods sold	(28,000)
Gross profit	$32,000	per unit

In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. 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 basesassociated with these activities are:

Activity		Budgeted Activity Cost				Activity Base
Customer service			$31,500			Number of service requests
Project bidding			74,000			Number of bids
Engineering support			120,750			Number of customer design changes
	Total activity cost		$226,250

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

	Gough Industries			Breen Inc.		The Martin Group		Total
Number of service requests	36			28		116		180
Number of bids	50			40		95		185
Number of customer design changes	18			35		108		161
Unit volume	30			16		4		50

Required:

Question Content Area

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Round to the nearest whole dollar.

	Activity Rate
Customer Service	$fill in the blank 954570fc2fcb029_1 per serv. req.
Project Bidding	$fill in the blank 954570fc2fcb029_2 per bid
Engineering Support	$fill in the blank 954570fc2fcb029_3 per design changes

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

	Activity Costs
Gough Industries	$fill in the blank 954570fc2fcb029_4
Breen Inc.	$fill in the blank 954570fc2fcb029_5
The Martin Group	$fill in the blank 954570fc2fcb029_6

Question Content Area

3. 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 operating income associated with each customer.

Arctic Air Inc. Customer Profitability Report For the Year Ended December 31

	Gough Industries	Breen Inc.	The Martin Group
Revenues	$fill in the blank abc7aa011ffb04f_1	$fill in the blank abc7aa011ffb04f_2	$fill in the blank abc7aa011ffb04f_3
Cost of goods sold	fill in the blank abc7aa011ffb04f_4	fill in the blank abc7aa011ffb04f_5	fill in the blank abc7aa011ffb04f_6
Gross profit	$fill in the blank abc7aa011ffb04f_7	$fill in the blank abc7aa011ffb04f_8	$fill in the blank abc7aa011ffb04f_9
Selling and administrative activities:
Customer service	$fill in the blank abc7aa011ffb04f_10	$fill in the blank abc7aa011ffb04f_11	$fill in the blank abc7aa011ffb04f_12
Project bidding	fill in the blank abc7aa011ffb04f_13	fill in the blank abc7aa011ffb04f_14	fill in the blank abc7aa011ffb04f_15
Engineering support	fill in the blank abc7aa011ffb04f_16	fill in the blank abc7aa011ffb04f_17	fill in the blank abc7aa011ffb04f_18
Total selling and administrative activities	$fill in the blank abc7aa011ffb04f_19	$fill in the blank abc7aa011ffb04f_20	$fill in the blank abc7aa011ffb04f_21
Operating income (loss)