Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses

Naper Inc. manufactures power equipment. Naper has two primary productsgenerators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31:

	Generators		Air Compressors			Total
Revenue	$1,087,800			$1,844,200		$2,932,000
Cost of goods sold	815,850			1,383,150		2,199,000
Gross profit	$271,950			$461,050		$733,000
Selling and administrative expenses						161,800
Income from operations						$571,200

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		$50	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
Number of sales orders	333		768
Number of service requests	64		363

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

	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 all amounts as positive numbers.

Naper Inc.
Product Profitability Report
For the Year Ended December 31
	Generators	Air Compressors	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	%	%