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 senior marketing management for the year ended December 31 Air Generators Compressors Total Revenue Cost of goods sold Gross profit Selling and administrative expenses Income from operations $1,281,000 $2,263,080 $3,544,080 1,697,310 2,658,060 $886,020 196,920 $689,100 960,750 $320,250 $565,770 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 Sales order processing Post-sale customer service Service requests $290 per customer service request The controller determined the following activity-base usage information about each product: Activity Base Activity Rate Sales orders $40 per sales order Generators Air Compressors Number of sales orders Number of service requests a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. 403 779 439 Sales Order Processing Activities Cost Post-sale Customer Service 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 al amounts as positive numbers. Naper, Inc. Product Profitability Report For the Year Ended December 31 Generatos Air Total Revenues Cost of goods sold Gross profit Sales order processing Post-sale customer service Total selling and administrative expense Income from operations 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 user of Naper's sales and service activities. Many factors cause the air compressors to have income from operations as a percent of sales than generators
