Chapter 18 Problem eBook Calculator Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses Naper Inc. manufactures power equipment. Naper has two primary products-generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31: Total Revenue Air Generators Compressors $1,427,900 $2,156,600 1,142,320 1,725,280 $285,580 $431,320 $3,584,500 Cost of goods sold Gross profit Selling and administrative expenses 2,867,600 $716,900 155,100 $561,800 Income from operations The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as shown below. Activity Activity Base Activity Rate Sales order processing Sales orders $40 per sales order Post-sale customer service Service requests $250 per customer service request The controller determined the following activity-base usage information about each product: Generators Air Compressors 04 ENG Generators Air Compressors 332 758 Number of sales orders Number of service requests 84 362 a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. Sales Order Processing Post-sale Customer Service Activities Cost Activities Cost Generators Air Compressors Total b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. Round percentages to one decimal place. Enter all amounts as positive numbers. Naper Inc. Product Profitability Report For the Year Ended December 31 Generators Air Compressors 1427.900 2,156,600 1.142.320 1.725.280 Total Revenues 3,584,500 2.867.600 Cost of goods sold 285,580 431,320 716,900 Gross profit Sales order processing Naper Inc. Product Profitability Report For the Year Ended December 31 Generators Alr Compressors 1.427.900 2.156,600 Total Revenues 3,584,500 Cost of goods sold 1.142.320 1.725.280 2,867,600 Gross profit 285.580 431,320 716,900 Sales order processing Post-sale customer service Total selling and administrative expense Income from operations 155.100 561.800 Gross profit as a percentage of sales Income from operations as a percentage of sales c. Interpret the product profitability report. The air compressors have the income from operations to sales percentage because the product is a activities. Many factors cause the air compressors to have income from operations as a percent of sales than generators. user of Naper's sales and service
