Reference no: EM132690737

Problem - Allocating selling and administrative expenses using activity-based costing

Z-Rox Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

Price	$890 per unit
Cost of goods sold	510
Gross profit	$380 per unit

In addition, the company incurs selling and administrative expenses of $307,150. The company wishes to assign these costs to its three major retail customers, Office Warehouse, Office To-Go, and Office Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Z-Rox Inc. to support the retailer's sale of Z-Rox copiers to consumers. The budgeted activity costs and activity bases associated with these activities are:

Activity	Budgeted Activity Cost	Activity Base
Customer service	$ 54,450	Number of service requests
Sales order processing	18,700	Number of sales orders
Advertising support	234,000	Number of ads placed
Total activity cost	$307,150

Activity-base usage and unit volume information for the three customers is as follows:

	Office Warehouse	Office To-Go	Office Universe	Total
Number of service requests	50	260	20	330
Number of sales orders	240	500	110	850
Number of ads placed	20	140	35	195
Unit volume	650	650	650	1,950

Instructions -

1. Determine the activity rates for each of the three nonmanufacturing activities.

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2012, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer.

4. Provide recommendations to management, based on the profitability reports in (3).