Problem 5-49 Customer Profitab
Problem 5-49 Customer Profitability Analysis [LO 5-1, 5-6]
Ellie Mosk, CEO of X-Space Industries, decided to expand thecompany’s product offering beyond the core model rocket business.After investigation, she decided to set up a separate division todesign and manufacture products for the drone market. Severalcompanies were interested in having X-Space develop these drones,and financial results, to date, have been encouraging. Revenue was$4 million, gross margins have been running about 40%, and thecustomer sales and support costs were $1 million. However, there isa growing concern that some customers require a disproportionateshare of the sales and support resources, and the trueprofitability of the customers is unknown. Data were collected tosupport an analysis of customer profitability:
| Activity | Cost Driver | Total Cost | ||
| Sales visits | Sales visit days | $ | 487,000 | |
| Product modifications | Number of modifications | 271,000 | ||
| Phone calls | Number of minutes | 93,100 | ||
| E-mail/electronic communications | Number of communications | 173,000 | ||
| $ | 1,024,100 | |||
| Customer | Revenue | Gross Profit | Visit Days | Modifications | Phone Minutes | ElectronicCommunications | ||||||||||||||||||
| A | $ | 401,000 | $ | 151,000 | 15 | 15 | 1,140 | 625 | ||||||||||||||||
| B | 501,000 | 201,000 | 25 | 15 | 1,230 | 875 | ||||||||||||||||||
| C | 601,000 | 231,000 | 40 | 40 | 1,480 | 1,110 | ||||||||||||||||||
| D | 1,110,000 | 421,000 | 90 | 60 | 1,830 | 2,110 | ||||||||||||||||||
| E | 1,510,000 | 591,000 | 100 | 70 | 2,230 | 2,360 | ||||||||||||||||||
| Totals | $ | 4,123,000 | $ | 1,595,000 | 270 | 200 | 7,910 | 7,080 | ||||||||||||||||
Required:
1. Management felt the easiest way to allocate the sales andsupport costs was based on the total revenue. Using total revenueas the allocation base, determine the profitability of each of thefive customers.
2. Management felt that because the data revealed some customersrequire a disproportionate share of sales and support resources,activity-based costing should be used to determine customerprofitability. Use ABC to prepare a customer profitabilityanalysis.
Problem 5-49 Customer Profitability Analysis [LO 5-1, 5-6]
Ellie Mosk, CEO of X-Space Industries, decided to expand thecompany’s product offering beyond the core model rocket business.After investigation, she decided to set up a separate division todesign and manufacture products for the drone market. Severalcompanies were interested in having X-Space develop these drones,and financial results, to date, have been encouraging. Revenue was$4 million, gross margins have been running about 40%, and thecustomer sales and support costs were $1 million. However, there isa growing concern that some customers require a disproportionateshare of the sales and support resources, and the trueprofitability of the customers is unknown. Data were collected tosupport an analysis of customer profitability:
| Activity | Cost Driver | Total Cost | ||
| Sales visits | Sales visit days | $ | 487,000 | |
| Product modifications | Number of modifications | 271,000 | ||
| Phone calls | Number of minutes | 93,100 | ||
| E-mail/electronic communications | Number of communications | 173,000 | ||
| $ | 1,024,100 | |||
| Customer | Revenue | Gross Profit | Visit Days | Modifications | Phone Minutes | ElectronicCommunications | ||||||||||||||||||
| A | $ | 401,000 | $ | 151,000 | 15 | 15 | 1,140 | 625 | ||||||||||||||||
| B | 501,000 | 201,000 | 25 | 15 | 1,230 | 875 | ||||||||||||||||||
| C | 601,000 | 231,000 | 40 | 40 | 1,480 | 1,110 | ||||||||||||||||||
| D | 1,110,000 | 421,000 | 90 | 60 | 1,830 | 2,110 | ||||||||||||||||||
| E | 1,510,000 | 591,000 | 100 | 70 | 2,230 | 2,360 | ||||||||||||||||||
| Totals | $ | 4,123,000 | $ | 1,595,000 | 270 | 200 | 7,910 | 7,080 | ||||||||||||||||
Required:
1. Management felt the easiest way to allocate the sales andsupport costs was based on the total revenue. Using total revenueas the allocation base, determine the profitability of each of thefive customers.
2. Management felt that because the data revealed some customersrequire a disproportionate share of sales and support resources,activity-based costing should be used to determine customerprofitability. Use ABC to prepare a customer profitabilityanalysis.
Problem 5-49 Customer Profitability Analysis [LO 5-1, 5-6]
Ellie Mosk, CEO of X-Space Industries, decided to expand thecompany’s product offering beyond the core model rocket business.After investigation, she decided to set up a separate division todesign and manufacture products for the drone market. Severalcompanies were interested in having X-Space develop these drones,and financial results, to date, have been encouraging. Revenue was$4 million, gross margins have been running about 40%, and thecustomer sales and support costs were $1 million. However, there isa growing concern that some customers require a disproportionateshare of the sales and support resources, and the trueprofitability of the customers is unknown. Data were collected tosupport an analysis of customer profitability:
| Activity | Cost Driver | Total Cost | ||
| Sales visits | Sales visit days | $ | 487,000 | |
| Product modifications | Number of modifications | 271,000 | ||
| Phone calls | Number of minutes | 93,100 | ||
| E-mail/electronic communications | Number of communications | 173,000 | ||
| $ | 1,024,100 | |||
| Customer | Revenue | Gross Profit | Visit Days | Modifications | Phone Minutes | ElectronicCommunications | ||||||||||||||||||
| A | $ | 401,000 | $ | 151,000 | 15 | 15 | 1,140 | 625 | ||||||||||||||||
| B | 501,000 | 201,000 | 25 | 15 | 1,230 | 875 | ||||||||||||||||||
| C | 601,000 | 231,000 | 40 | 40 | 1,480 | 1,110 | ||||||||||||||||||
| D | 1,110,000 | 421,000 | 90 | 60 | 1,830 | 2,110 | ||||||||||||||||||
| E | 1,510,000 | 591,000 | 100 | 70 | 2,230 | 2,360 | ||||||||||||||||||
| Totals | $ | 4,123,000 | $ | 1,595,000 | 270 | 200 | 7,910 | 7,080 | ||||||||||||||||
Required:
1. Management felt the easiest way to allocate the sales andsupport costs was based on the total revenue. Using total revenueas the allocation base, determine the profitability of each of thefive customers.
2. Management felt that because the data revealed some customersrequire a disproportionate share of sales and support resources,activity-based costing should be used to determine customerprofitability. Use ABC to prepare a customer profitabilityanalysis.
Answer:
| Req 1. | ||||||||||||
| Customer | Revenue | Gross profit | % Total Revenue | Total OH | Allocated OH | Net income | ||||||
| A | 401000 | 151000 | 9.73% | 1024100 | 99603 | 51397 | ||||||
| B | 501000 | 201000 | 12.15% | 1024100 | 124442 | 76558 | ||||||
| C | 601,000 | 231,000 | 14.58% | 1024100 | 149281 | 81719 | ||||||
| D | 1,110,000 | 421,000 | 26.92% | 1024100 | 275710 | 145290 | ||||||
| E | 1,510,000 | 591,000 | 36.62% | 1024100 | 375065 | 215935 | ||||||
| Total | 4,123,000 | 1,595,000 | 100.00% | 1024100 | 1024100 | 570900 | ||||||
| Req 2. | ||||||||||||
| Activity | Driver | Total Cost | Total Driver | Rate | ||||||||
| Sales visit | Visit days | 487,000 | 270 | 1803.70 | ||||||||
| Product Modification | Modification | 271,000 | 200 | 1355.00 | ||||||||
| Phone calls | Minutes | 93100 | 7910 | 11.77 | ||||||||
| Communication | 173000 | 7080 | 24.44 | |||||||||
| Overheads allocation: | ||||||||||||
| Rate | Customer A | Customer B | Customer C | Customer D | Customer E | |||||||
| Activity | Activity | OH | Activity | OH | Activity | OH | Activity | OH | Activity | OH | ||
| Sales visit | 1803.7 | 15 | 27055.5 | 25 | 45092.5 | 40 | 72148 | 90 | 162333 | 100 | 180370 | |
| Product Modification | 1355 | 15 | 20325 | 15 | 20325 | 40 | 54200 | 60 | 81300 | 70 | 94850 | |
| Phone calls | 11.77 | 1140 | 13417.8 | 1230 | 14477.1 | 1480 | 17419.6 | 1830 | 21539.1 | 2230 | 26247.1 | |
| 24.44 | 625 | 15275 | 875 | 21385 | 1110 | 27128.4 | 2110 | 51568.4 | 2360 | 57678.4 | ||
| 76073 | 101280 | 170896 | 316741 | 359145 | ||||||||
| Customer | Revenue | Gross profit | Allocated Oh | Net income | ||||||||
| A | 401000 | 151000 | 76073 | 74927 | ||||||||
| B | 501000 | 201000 | 101280 | 99720 | ||||||||
| C | 601,000 | 231,000 | 170896 | 60104 | ||||||||
| D | 1,110,000 | 421,000 | 316741 | 104259 | ||||||||
| E | 1,510,000 | 591,000 | 359145 | 231855 | ||||||||
| Total | 4,123,000 | 1,595,000 | ||||||||||
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