The young founders of the company have become increasingly concerned with the economics many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-bas costing system has been designed. Three major activities are carried out in the company: animation concept, animation p and contract administration. The animation concept activity is carried out at the contract proposal of the business-particularly since This is an intensive activity that involves individuals f roduction, stage when the company bids on from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contr administration begins. Almost all of the work involved in animation production is done by the technical s administrative staff is larg below esponsible for contract administration. The activity cost pools and their activity measures are listed Activity Cost Pool Activity Measure Animation concept Animation production Contract administration Activity Rate Number of proposals Minutes of completed animation Number of contracts $6,200 per proposal $7,900 per minute $6,800 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. 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 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 Activity Heasure Number of proposals Minutes of completed animation Number of contracts Local Commercials 2 8 14 10 The total sales from the 10 contracts for local commercials was $210,000 Required 1. Calculate the cost of serving the local commercial market 2. Calculate the margin earned serving the local commercial market. (Remember, this company has no direct materials or direct labor costs.)
