Question

2 parts Only

Elle Mosk, CEO of X Space Industries, decided to expand the company's product offering beyond the core model rocket business After Investigation, she decided to set up a separate division to design and manufacture products for the drone market. Several companies 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 the customer sales and support costs were $1 million. However, there is a growing concern that some customers require a disproportionate share of the sales and support resources, and the true profitability of the customers is unknown. Data were collected to support an analysis of customer profitability Activity Sales visits Product modifications Phone calls E-mail/electronic communications Cost Driver Sales visit days Number of modifications Number of minutes Number of communications Total Cost $ 480,000 266,880 92.600 168,000 $1,006,603 Visit Days Customer Modifications Revenue $ 394, Bee 494,000 594,000 1.060.000 1.440,000 $3,982,000 Gross Profit $ 144,000 194,000 224.000 414,000 584,000 $1.550.000 Phone Minutes 1,090 1.180 1,430 1.780 Electronic Communications 625 875 1.060 2.060 2.31 6,938 199 2,180 Totals 7,660 Required: 1. Management felt the easiest way to allocate the sales and support costs was based on the total revenue. Using total revenue as the allocation base, determine the profitability of each of the five customers 2. Management felt that because the data revealed some customers require a disproportionate share of sales and support resources, activity-based costing should be used to determine customer profitability. Use ABC to prepare a customer profitability analysis

Answer 1

Customer Profit % Share of support Gross Profit (A)] costs based on revenue (B) 144,000 $ 99,598 194,000 $ 124,877 $ 224,000 $ 150,156 $ 414,000 $ 267,955 584,000 $ 364,014 $ 1,560,000 $ 1,006,600 Profit after support costs (A-B) $ 44,402 $ 69,123 $ 73,844 $ 146,045 $ 219,986 $ 553,400 11.27% 13.99% 12.43% 13.78% 15.28% D Totals Working Note: Allocation of Sales and support costs on the basis of sales revenue Customer Sales Revenue % of sales based on total sales (A) Total Sales and support costs (B) A B $ $ $ $ $ $ 394,000 494,000 594,000 1,060,000 1,440,000 3,982,000 9.89% $ 1,006,600 12.41% $ 1,006, 600 14.92% $ 1,006,600 26.62% $ 1,006, 600 36.16% $ 1,006,600 100.00% Allocated sales and support costs (A*B) $ 99,598 $ 124,877 $ 150,156 $ 267,955 $ 364,014 $1,006, 600 D Totals Percentage of Sales = each customer sales / total sales *100 Sales and support cost = Total Sales and support cost * each customer sales percentage

Profit percentage = Profit after support costs / Sales revenue *100 Customer Profit % Profit after Sales Revenue support costs $ 394,000 $ 44,402 $ 494,000 $ 69,123 594,000 $ 73,844 1,060,000 $ 146,045 1,440,000 $ 219,986 $ 3,982,000 $ 553,400 5 11.27% 13.99% 12.43% 13.78% 15.28% Totals Net Profit Customer Gross Profit (A) А $ 144,000 194,000 224,000 414,000 584,000 1,560,000 Profit after ABC Costs (B) support costs (A-B) $ 74,946 $ 69,054 $ 99,871 $ 94,129 $ 167,295 $ 56,705 $ 311,257 $ 102,743 $ 353,231 $ 230,769 $ 1,006,600 $ 553,400 17.53% 19.05% 9.55% 9.69% 16.03% Totals $

D Cost driver activiy Cost driver Base Cost Driver Quantity (A) Sales and supportCost B) Cost Driver Rate (B/A) Cost Cost assigned Cost Driver Cost Quantity assigned Cost Driver Quantity Cost assigned Cost Cost Driver Driver Quantity Cost assigned Quantity Cost assigned Quantity | 1,778 1,330 Sales visits Sales Visit days Product modifications No. of modifications Phone calls No. of minutes Rirctonic communications No of communication Total 270 200 7660 6930 $ 480,000 $ $ 266,000 $ $ 92,600 $ 168,000 $ $ 1,006,600 15 15 1090 625 $ $ $ $ $ 26,667 19,950 13,177 15,152 74,946 25 15 1180 875 $ 44,444 $ 19,950 $ 14,265 $ 21,212 $ 99,871 40 40 1430 1060 12 $ 71,111 $ 53,200 $ 17,287 $ 25,697 $ 167,295 90 60 1780 2060 $ 160,000 $ 79,800 $ 21,518 $ 49,939 $ 311,257 100 70 2180 2310 $177,778 $ 93,100 $ 26,353 $ 56,000 $353,231 24 Note: Cost Driver rate = total sales and support cost / Cost driver quantity Cost assigned = Cost driver quantity alloted * Cost driver rate

Profit percentage = Profit after support costs / Sales revenue 100 Customer Sales Revenue Net Profit % Profit after support costs $ $ 94,129 $ 56,705 $ 102,743 $ 230,769 $ 553,400 C D E Totals 394,000 494,000 594,000 1,060,000 1,440,000 3,982,000 $ $ $ $ 17.53% 19.05% 9.55% 9.69% 16.03%