AnimPix Inc. is a small company that creates computer-generated animations for films and television. Much of the companys work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

The young founders of the company have become increasingly concerned with the economics of the businessparticularly since many competitors have sprung up recently in the local area. To help understand the companys cost structure, an ABC system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staff do almost all of the work involved in animation production, whereas administrative staff are largely responsible for contract administration. The activity cost pools and their activity measures and rates are listed below:

Activity Cost Pool	Activity Measure	Activity Rate
Animation concept	Number of proposals	$	6,040	per proposal
Animation production	Minutes of animation	$	7,725	per minute of animation
Contract administration	Number of contracts	$	6,800	per contract

These activity rates include all of the costs of the company, except for the costs of idle capacity and organization-sustaining costs. There are no direct labour or direct materials costs.

Preliminary analysis using these activity rates has indicated that the local commercials segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask several companies like AnimPix to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below:

Activity Measure	Local Commercials
Number of proposals		25
Minutes of animation		5
Number of contracts		10

The total sales for local commercials amounted to $180,000.

Required: 1. Determine the cost of the local commercials market. (Think of the local commercials market as a product.) ABC Cost Activity Cost Pool Animation concept Animation production Contract administration Total 2. Prepare a report showing the product margin of the local commercials market. (Remember, this company has no direct materials or direct labour costs.) Sales Costs Animation concept Animation production Contract administration Product margin