Labels
For the Year Ended December 31
December 31
Selling and administrative expenses
Amount Descriptions
Cost of goods sold
Gross profit
Income from operations
Post-sale customer service
Revenues
Sales order processing
Total selling and administrative expense

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

1		Generators	Air Compressors	Total
2	Revenue	$1,970,000.00	$1,460,000.00	$3,430,000.00
3	Cost of goods sold	1,339,600.00	992,800.00	2,332,400.00
4	Gross profit	$630,400.00	$467,200.00	$1,097,600.00
5	Selling and administrative expenses			362,558.00
6	Income from operations			$735,042.00

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 follows:

Activity	Activity Base	Activity Rate
Sales order processing	Sales orders	$ 83 per sales order
Post-sale customer service	Service requests	$305 per customer service request

The controller determined the following activity-base usage information about each product:

	Generators	Air Compressors
Number of sales orders	983	1,173
Number of service requests	142	460

Required:

a.

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

b.

Construct product profitability reports for the three products, dated for the year ended December 31, using the activity costs in (a). The reports should disclose the gross profit and income from operations associated with each products. Refer to the Labels and Amount Descriptions for exact wording of text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers, except for a negative income from operations. Round percentages to the one decimal place. Colons will appear automatically.

c.

Interpret the product profitability report.

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

Activity Cost

Generators

Air Compressors

Total

Sales order processing activities

Post-sale customer

service activities

b. Construct product profitability reports for the three products, dated for the year ended December 31, using the activity costs in (a). The reports should disclose the gross profit and income from operations associated with each products. Refer to the Labels and Amount Descriptions for exact wording of text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers, except for a negative income from operations. Round percentages to the one decimal place. Colons will appear automatically.

Naper Inc.

Product Profitability Report

1		Generators	Air Compressors	Total
2
3
4
5
6
7
8
9
10	Gross profit as a percentage of sales
11	Income from operations as a percentage of sales		.