Construct and Interpret a Product Profitability Report, Allocating Selling and A
ID: 2590852 • Letter: C
Question
Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses Volt-Gear, Inc., manufactures power equipment. Volt-Gear has two primary products-generators and air compressors. The following report was prepared by the controller for Volt-Gear senior marketing management for the year ended Dec. 31, 2016; Air Generators Total Compressors Revenue Cost of goods sold Gross profit Selling and administrative expenses Income from operations $1,574,500 $2,713,700 $4,288,200 3,430,560 $857,640 189,840 $667,800 1,259,600 2,170,960 $314,900 $542,740 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service The controller was able to determine the activity base and activity rate for each activity, as shown below Activity Activity Base Activity Rate Sales orders $60 per sales order Sales order processing Post-sale customer service Service requests $280 per customer service request The controller determined the following activity-base usage information about each productExplanation / Answer
ans)
a) Sales order processing Post-sale customer service
Activities cost Activities cost
Generators 20160 17640
(336 X 60) (280 X 63)
Air Compressors 49560 102480
(826 X 60) (280 X 366)
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Total 69720 120120
b)
Product profitability report
Fornthe year ended December 31
Income from operations
as a % of sale
Generators Air compressors Total Revenues 1574500 2713700 4288200 Cost of goods sold 1259600 2170960 3430560 Gross profit 314900 542740 857640 sales order processing 20160 49560 69720 Post sale customer service 17640 102480 120120 Total selling and administrative expense 37800 152040 189840 Income from operations 277100 390700 667800 Gross profit as a % of sales 20% 20%