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Allocating Selling and Administrative Expenses using Activity-Based Costing Western Mechanical Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for

Allocating Selling and Administrative Expenses using Activity-Based Costing

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

Price $710 per unit
Cost of goods sold 430
Gross profit $280 per unit

In addition, the company incurs selling and administrative expenses of $215,060. The company wishes to assign these costs to its three major customers, Coastal Atlantic University, Celebrity Arena, and Hope 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 basesassociated with these activities are:

Activity Budgeted Activity Cost Activity Base
Customer service $39,960 Number of service requests
Project bidding 28,800 Number of bids
Engineering support 146,300 Number of customer design changes
Total costs $215,060

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

Coastal Atlantic University Celebrity Arena Hope Hospital Total
Number of service requests 60 10 200 270
Number of bids 250 110 540 900
Number of customer design changes 20 10 80 110
Unit volume 570 570 570 1,710

Required:

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

Activity Rate
Customer Service $ per serv. req.
Project bidding $ per bid
Engineering Support $ per customer design change

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

Activity Costs
Coastal Atlantic University $
Celebrity Arena $
Hope Hospital $

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2016, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations.

Western Mechanical Inc.
Customer Profitability Report
For the Year Ended December 31, 2016
Coastal Atlantic University Celebrity Arena Hope Hospital
Revenues $ $ $
Less cost of goods sold
Gross profit $ $ $
Less selling and administrative activities:
Customer service $ $ $
Project bidding
Engineering support
$ $ $
Income (loss) from operations $ $ $

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