Brent Company's cost system assigns MSDA expenses to customers using a rate of 40% of sales revenue. The new CFO has discovered that Brent's customers differ greatly in their ordering patterns and interaction with Brent's sales force. Because the CFO believes Brent's cost system does not accurately assign MSDA expenses to customers, he developed an ABC system and gathered the following information.

Austin Brooke

Sales $860,000 $700,000

Cost of Goods Sold 440,000 310,000

Sales representative trips 10 40

Service customers 12 18

Handle customer orders 30 70

Ship to customers 30 70

Total Budgeted Sales Rep Travel Cost $ 111,663 Planned Number of Annual Sales Trips 55

Total Budgeted Customer Service Cost $ 273,684 Planned Number of Customer Service Calls 25

Total Budgeted Customer Order Cost $ 28,463 Planned Number of Customer Orders 150

Total Budgeted Shipping Cost $ 210,189 Planned Number of Orders Shipped 120

Required:

a) Using the current cost system's approach of assigning MSDA expenses to customers using a rate of 40% of sales revenue, determine the operating profit associated with Austin and with Brooke.

b) Using the activity-based costing information provided, determine the operating profit associated with Austin and with Brooke.

c) Which of the two methods produces more accurate assignments of MSDA expenses to customers? Explain.