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

Category	Per Unit Dollar Amount
Price	$60,000
Cost of goods sold	28,000
Gross profit	32,000

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 bases associated with these activities are:

Activity	Budgeted Activity Cost	Activity Base
Customer service	$51,500	Number of service requests
Project bidding	64,000	Number of bids
Engineering support	110,500	Number of customer design changes
Total costs	226,000

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

Activity	Gough Industries	Breen Inc.	The Martin Group	Total
Number of service requests	35	27	115	177
Number of bids	50	40	95	185
Number of customer design changes	18	35	108	161
Unit volume	30	16	4	50

Instructions

1. Determine the activity rates for each of the three nonmanufacturing activity pools.
2. Determine the activity costs allocated to the three customers, using the activity rates in (a).
3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (b). The reports should disclose the gross profit and income from operations associated with each customer.
4. Provide recommendations to management on how operations can be improved based on the profitability reports in (c).