Pixel Studio, Inc., is a small company that creates computer$-$generated animations for films and tclevision. Much of the company's work consists of short commercials 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 help 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 carried out

that involves individuals from all parts of the company in creating story boards and prototype

stis to be showa to ine prospoetve cheme Once a prosoet is decepted oy ine clicht the anima" tion goes into production and contract administration begins. Almost all of the work involved in animation production is done by ine tcchnical stal, whereas the administrative statt is largery responsible for contract administration. The activity cost pools and their activity measures are

$343$

Activity Cost Pool

Animation concept...

Animation production

Contract administration.

Activity Measure

Number of proposals

Minutes of completed animation

Number of contracts

Activity Rate

$$6\mathrm{.}040$ per proposal

$$7\mathrm{.}725$ per minute

$$6\mathrm{.}800$ per contract

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 materials costs.

Prenminary analysis using tnese activity raies bas tnuscarce that the local commercial ses" ment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid. which results 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 local commercial market appear below:

Actay Measure

Number of proposal.........

Minutes of completed anim

Locall

Commercia

$25$