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Problem 7-19 (Static) Second Stage Allocations and Product Margins [LO7-4, LO7-5] Pixel Studio, Incorporated, is a small company that creates computer-generated animations for filims and television. Much of the company's work consists of short commerclais for television, but the company also does realistic computer animations for special effects in movies. The young founders of the company have become increasingly concerned with the economics of the business-particularly since many competitors have sprung up recently in the local area. To heip understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company. animation concept, animation production. and contract administration. The animation concept activity is camed out at the contract proposal stage when the company. bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective cllent. Once a project is accepted by the client, the animation goes into production and contract administration begins. Aimost all of the work Involved in antmation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are ilsted below: These activity rates include all of the company's costs, except for its organization-sustaining costs and idle capacity costs. There are no direct labor or direct matenlais costs Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commerclats may ask three or four companies like Pixel Studio to bid, which resuits In an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the locai commerclal market appear below. The total sales from the 10 contracts for local commercials was $180.000. Required: 1 Calculate the cost of serving the local commercial market. 2 Caiculate the margin earned serving the local commerclal market. (Remember, this company has no direct matenals or direct labor costs) Complete this question by entering yout answers in the tabs below