Reference no: EM132690690

Problem - Activity-based costing and customer profitability

Schneider Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate:

Customer Service Activity	Activity Base	Activity Rate
Bid preparation	Number of bid requests	$220/request
Shipment	Number of shipments	$18/shipment
Support standard items	Number of standard items ordered	$24/std. item
Support nonstandard items	Number of nonstandard items ordered	$82/nonstd. item

Assume that the company had the following gross profit information for three representative customers:

	Customer 1	Customer 2	Customer 3
Revenue	$32,300	$21,500	$26,000
Cost of goods sold	19,380	11,180	12,480
Gross profit	$12,920	$10,320	$13,520
Gross profit as a percent of sales	40%	48%	52%

The administrative records indicated that the activity-base usage quantities for each customer were as follows:

Activity Base	Customer 1	Customer 2	Customer 3
Number of bid requests	10	6	22
Number of shipments	14	23	42
Number of standard items ordered	45	36	51
Number of nonstandard items ordered	16	26	50

Required -

a. Prepare a customer profitability report dated for the year ended December 31, 2012, showing (1) the income from operations after customer service activities, (2) the gross profit as a percent of sales, and (3) the income from operations after customer service activities as a percent of sales. Prepare the report with a column for each customer. Round percentages to the nearest whole percent.

b. Interpret the report in part (a).