Problem 2 (LO3, LO4)

Product and Customer Profitability Analysis

PWC Systems, Inc., makes jet skis and other personal watercraft for sale through specialty sporting goods stores. The company has a standard jet ski model, but also makes custom-designed models. Management has designed an activity-based costing system with the following activity cost pools activity rates:

Activity Cost Pool Activity Rates

Supporting manufacturing $22 per direct labour-hour

Order processing $212 per order

Custom design processing $243 per custom design

Customer service $307 per customer

Management would like an analysis of the profitability of a particular customer, Wave Rider, which has ordered the following products over the last 12 months:

Standard Customer

Model Design

Number of jet skis 16 3

Number of orders 2 3

Number of custom designs 0 3

Direct labour-hours per jet ski 24.5 28.0

Selling price per jet ski $10,600 $13,200

Direct materials cost per jet ski $7,950 $9,240

The company's direct labour rate is $24 per hour.

Required:

Using the company's activity-based costing system, compute the customer margin of Wave Rider.

Problem 3 (LO2, LO3)

Activity-Based Costing and Bidding on Jobs

Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. The company's estimator has been involved in a long-simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square metres by $4,000 per thousand square metres to determine the bid price. Since our average cost is only $3,000 per thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart."

To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:

Activity Cost Pool Activity Measure Total Activity

Removing asbestos Thousands of square metres 500,000 m2

Estimating and job setup Number of jobs 200 jobs*

Working on non-routine jobs Number of non-routine jobs 25 non-routine jobs

Other (costs of idle capacity and

organization-sustaining costs) Not applicable; these costs are

not allocated to jobs

*The total number of jobs includes non-routine jobs as well as routine jobs. Non-routine jobs as well as routine jobs require estimating and setup work.

Wages and salaries $200,000

Disposal fees 600,000

Equipment depreciation 80,000

On-site supplies 60,000

Office expenses 190,000

Licensing and insurance 370,000

Total cost $1,500,000

Distribution of Resource Consumption

across Activity Cost Pools

Estimating Working on

Removing and Job Non-routine

Asbestos Setup Jobs OtherTotal

Wages and salaries 40% 10% 35% 15% 100%

Disposal fees 70% 0% 30% 0% 100%

Equipment depreciation 50% 0% 40% 10% 100%

On-site supplies 55% 15% 20% 10% 100%

Office expenses 10% 40% 30% 20% 100%

Licensing and insurance 50% 0% 40% 10% 100%

Required:

1. Perform the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square metres of each of the following jobs according to the activity-based costing system.
   1. A routine 2,000-square-metre asbestos removal job.
   2. A routine 4,000-square-metre asbestos removal job.
   3. A non-routine 2,000-square-metre asbestos removal job.

4. Given the results you obtained in (3) above, do you agree with the estimator that the company's present policy for bidding on jobs is adequate?