Cold Zone Mechancial Inc. manufactures cooling units for commercial buildings. T
ID: 2579663 • Letter: C
Question
Cold Zone Mechancial Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:
1
Price per unit
$75,000.00
2
Cost of goods sold
60,000.00
3
Gross profit per unit
$15,000.00
In addition, the company incurs selling and administrative expenses of $231,880. The company wishes to assign these costs to its three major customers, Good Knowledge University, Hot Shotz Arena, and Break-a-Leg Hospital. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are:
1
Activity
Budgeted Activity Cost
Activity Base
2
Customer service
$83,720.00
Number of service requests
3
Project bidding
61,360.00
Number of bids
4
Engineering support
86,800.00
Number of customer design changes
5
Total costs
$231,880.00
Activity-base usage and unit volume information for the three customers is as follows:
Cold Zone Mechancial Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:
1
Price per unit
$75,000.00
2
Cost of goods sold
60,000.00
3
Gross profit per unit
$15,000.00
In addition, the company incurs selling and administrative expenses of $231,880. The company wishes to assign these costs to its three major customers, Good Knowledge University, Hot Shotz Arena, and Break-a-Leg Hospital. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are:
1
Activity
Budgeted Activity Cost
Activity Base
2
Customer service
$83,720.00
Number of service requests
3
Project bidding
61,360.00
Number of bids
4
Engineering support
86,800.00
Number of customer design changes
5
Total costs
$231,880.00
Activity-base usage and unit volume information for the three customers is as follows:
X
Labels and Amount Descriptions
X
Activity rates
Shaded cells have feedback.
1. Determine the activity rates for each of the three nonmanufacturing activity pools.
Score: 30/30
1
per serv. req.
2
per bid
3
per design change
Points:
6 / 6
Feedback
Check My Work
Calculate for each activity:
Total activity cost ÷ Total activity base = Activity Rate
X
Activity Costs
Shaded cells have feedback.
2. Determine the activity costs allocated to the three customers, using the activity rates in (1).
Score: 30/30
1
Activity Costs
2
3
4
Points:
6 / 6
Feedback
Check My Work
Calculate for each customer:
Activity usage x Activity rate from Req. (1) = Activity cost; Sum all activity costs per customer to determine a total and divide the total overhead by budgeted units to derive the activity costs per unit for each customer.
X
Customer Profitability Report
Shaded cells have feedback.
3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. Enter all amounts as positive numbers, except for a negative income from operations.
Score: 67/137
Cold Zone Mechanical Inc.
Customer Profitability Report
1
Good Knowledge University
Hot Shotz Arena
Break-a-Leg Hospital
2
3
4
5
6
7
8
9
10
Points:
16.63 / 34
Feedback
1
Price per unit
$75,000.00
2
Cost of goods sold
60,000.00
3
Gross profit per unit
$15,000.00
Explanation / Answer
1
The activity rates for each of the three nonmanufacturing activity pools
S.No
Activity
Activity Rate
1
Customer service
$ 260 per service request
2
Project bidding
$ 590 per bid
3
Engineering support
$ 400 per customer design change
Activity
Budgeted Activity Cost
Activity Base
Activity Rate = Budgeted Activity Cost/Activity base
Customer service
$ 83,720
Number of service requests - 322
$ 260
Project bidding
$ 61,360
Number of bids - 104
$ 590
Engineering support
$ 86,800
Number of customer design changes - 217
$ 400
2
The activity costs allocated to the three customers, using the activity rates in (1)
Customer
Activity Cost
Number of Units
Cost per Unit
Good KnowledgeUniversity
54,840
22
2,493
Hot Shotz Arena
36,140
14
2,581
Break-a-Leg Hospital
140,900
6
23,483
( in $)
Good KnowledgeUniversity
Hot Shotz Arena
Break-a-Leg Hospital
Activity Usage
Acivity rate
Activity Cost
Activity Usage
Acivity rate
Activity Cost
Activity Usage
Acivity rate
Activity Cost
Customer service
60
260
15,600
52
260
13,520
210
260
54,600
Project bidding
36
590
21,240
18
590
10,620
50
590
29,500
Engineering support
45
400
18,000
30
400
12,000
142
400
56,800
Total
54,840
36,140
140,900
3
Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2)
Good KnowledgeUniversity
Hot Shotz Arena
Break-a-Leg Hospital
Total
Sales units
22
14
6
42
Sales value
$ 1,650,000
$ 1,050,000
$ 450,000
$ 3,150,000
Less: Cost of goods sold
$ (1,320,000)
$ (840,000)
$ (360,000)
$ (2,520,000)
Gross profit
$ 330,000
$ 210,000
$ 90,000
$ 630,000
Less : Overheads
$ -
Customer service
$ (15,600)
$ (13,520)
$ (54,600)
$ (83,720)
Project bidding
$ (21,240)
$ (10,620)
$ (29,500)
$ (61,360)
Engineering support
$ (18,000)
$ (12,000)
$ (56,800)
$ (86,800)
Income from Operations
$ 275,160
$ 173,860
$ (50,900)
$ 398,120
1
The activity rates for each of the three nonmanufacturing activity pools
S.No
Activity
Activity Rate
1
Customer service
$ 260 per service request
2
Project bidding
$ 590 per bid
3
Engineering support
$ 400 per customer design change
Activity
Budgeted Activity Cost
Activity Base
Activity Rate = Budgeted Activity Cost/Activity base
Customer service
$ 83,720
Number of service requests - 322
$ 260
Project bidding
$ 61,360
Number of bids - 104
$ 590
Engineering support
$ 86,800
Number of customer design changes - 217
$ 400