Reference no: EM13948528

Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

 The young founders of the company have become increasingly concerned with the economics of the business-particularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below:

Activity Cost Pool	Activity Measure	Activity Rate
Animation concept	Number of proposals	$	6,040	per proposal
Animation production	Minutes of completed animation	$	7,725	per minute
Contract administration	Number of contracts	$	6,800	per contract

 These activity rates include all of the company's costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs.

Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below:

Activity Measure	Local Commercials
Number of proposals	25
Minutes of animation	5
Number of contracts	10

 The total sales from the 10 contracts for local commercials was $180,000.

In addition, the company has provided the following details concerning its activity rates:

	Activity Rates
	Animation Concept		Animation Production		Contract Administration
Technical staff salaries	$	4,000	$	6,000	$	1,600
Animation equipment depreciation		360		1,125		0
Administrative wages and salaries		1,440		150		4,800
Supplies costs		120		300		160
Facility costs		120		150		240
Total	$	6,040	$	7,725	$	6,800

Management has provided the following ease of adjustment codes for the various costs:

	Ease of Adjustment Code
Technical staff salaries	Red
Animation equipment depreciation	Red
Administrative wages and salaries	Yellow
Supplies costs	Green
Facility costs	Red

These codes created some controversy. In particular, some administrators objected to coding their own salaries Yellow, while the technical staff salaries were coded Red. However, the founders of the firm overruled these objections by pointing out that "our technical staff is our most valuable asset. Good animators are extremely difficult to find, and they would be the last to go if we had to cut back."

Required:

1. Determine the cost of the local commercials market. (Think of the local commercial market as a product.)

2. Prepare an action analysis report concerning the local commercial market. (This company has no direct materials or direct labor costs.)