X had calculated product and customer profitability by allocating all overhead as a function of machine hours. For 2019, X decided to use activity-based costing ABC. X wants to use the three primary cost drivers: machine hours, setups, and orders.

Concept/ Overhead costs/ Driver/ Unit of driver

General Manuf. overhead/ $3600000/ Machine-hour/ 20000

Set up cost/ $900000/ Number of setups/ 400

Commericial department costs/ $1500000/ # of orders/ 2000

Total overhead/ $6000000/ ?/ ?

X wants the profitability of its two top customers -South Gas and North Oil and plans to increase their profitability in 2020.

The order history:

Concept/ South Gas/ North Oil

Total Sales/ 160000/ 160000

Direct Material/ 64000/ 64000

Machine-hour 100/ 100

Number of orders 28/ 3

# of custom products ordered 22/ 3

Question:

What is the profitability of the South Gas and North Oil accounts in 2019 calculated using the single cost driver (i.e. # of machine hours)

South gas:

North Oil:

What is the profitability of the South Gas and North Oil accounts in 2019 calculated using ABC

South gas:

North Oil:

Based on response to last two questions above, suggest two actions X can implement to improve the profitability

1.

2.