Updraft Systems, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:
Activity Cost Pool
Activity Rate
Supporting manufacturing
$18 per direct labor-hour
Order processing
$184 per order
Custom designing
$255 per custom design
Customer service
$426 per customer
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Management would like an analysis of the profitability of a particular customer, Eagle Wings, which has ordered the following products over the last 12 months:
Standard Model : Custom Design
Number of gliders 13 : 3
Number of orders 2 : 3
Number of custom designs 0 : 3
Direct labor-hours per glider 29.50 : 32
Selling price per glider $1,725 : $2,350
Direct materials cost per glider $478 : $576
To analyze the profitability of the customer, Eagle Wings, using the activity-based costing system, we need to calculate the total cost for the products ordered and compare it with the selling price to determine the profitability.
First, let's calculate the cost for each activity based on the activity rates provided.
1. Supporting manufacturing:
- For the Standard Model:
Total supporting manufacturing cost = $18/activity rate * direct labor-hours per glider * number of gliders
- For the Custom Design:
Total supporting manufacturing cost = $18/activity rate * direct labor-hours per glider * number of gliders
2. Order processing:
- For the Standard Model:
Total order processing cost = $184/activity rate * number of orders
- For the Custom Design:
Total order processing cost = $184/activity rate * number of orders
3. Custom designing:
- For the Standard Model:
Total custom designing cost = $255/activity rate * number of gliders
- For the Custom Design:
Total custom designing cost = $255/activity rate * number of custom designs
4. Customer service:
- Total customer service cost = $426/activity rate * number of customers
Next, let's calculate the total cost for each product ordered by adding up the costs for each activity.
For the Standard Model:
Total cost = supporting manufacturing cost + order processing cost
For the Custom Design:
Total cost = supporting manufacturing cost + order processing cost + custom designing cost
Finally, we can calculate the profitability by subtracting the total cost from the selling price for each product.
For the Standard Model:
Profitability = selling price - total cost
For the Custom Design:
Profitability = selling price - total cost
By performing these calculations, we can determine the profitability of Eagle Wings and analyze the results.