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
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The company's direct labor rate is $18 per hour.
Using the company's activity-based costing system, compute the customer margin of Eagle Wings.
To compute the customer margin using the activity-based costing system, we need to determine the cost incurred for each activity for the customer, and then subtract those costs from the revenue generated from the customer.
First, let's calculate the cost for each activity for Eagle Wings:
1. Supporting Manufacturing:
- For the standard model: 13 gliders x 29.50 direct labor-hours per glider x $18 per direct labor-hour = $7,761
- For custom design: 3 gliders x 32 direct labor-hours per glider x $18 per direct labor-hour = $1,728
2. Order Processing:
- For the standard model: 2 orders x $184 per order = $368
- For custom design: 3 orders x $184 per order = $552
3. Custom Designing:
- For custom design: 3 custom designs x $255 per custom design = $765
4. Customer Service:
- For the standard model: 13 gliders x $426 per customer = $5,538
- For custom design: 3 gliders x $426 per customer = $1,278
Next, let's calculate the total cost incurred for Eagle Wings by summing up the costs for each activity:
For the standard model: $7,761 (Supporting Manufacturing) + $368 (Order Processing) + $5,538 (Customer Service) = $13,667
For custom design: $1,728 (Supporting Manufacturing) + $552 (Order Processing) + $765 (Custom Designing) + $1,278 (Customer Service) = $4,323
Now, let's calculate the revenue generated from Eagle Wings:
For the standard model: 13 gliders x $1,725 per glider = $22,425
For custom design: 3 gliders x $2,350 per glider = $7,050
Finally, let's compute the customer margin by subtracting the total cost from the revenue:
For the standard model: $22,425 - $13,667 = $8,758
For custom design: $7,050 - $4,323 = $2,727
Therefore, the customer margin of Eagle Wings is $8,758 for the standard model and $2,727 for custom design.