Reference no: EM131863258

Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper’s senior marketing management for the year ended December 31: 1 Generators Air Compressors Total 2 Revenue $4,200,000.00 $3,000,000.00 $7,200,000.00 3 Cost of goods sold 2,940,000.00 2,100,000.00 5,040,000.00 4 Gross profit $1,260,000.00 $900,000.00 $2,160,000.00 5 Selling and administrative expenses 610,000.00 6 Income from operations $1,550,000.00 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows: Activity Activity Base Activity Rate Sales order processing Sales orders $ 65 per sales order Post-sale customer service Service requests $200 per customer service request The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 3,000 4,000 Number of service requests 225 550 Required: a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. b. Construct product profitability reports for the three products, dated for the year ended December 31, using the activity costs in (a). The reports should disclose the gross profit and income from operations associated with each products. Refer to the Labels and Amount Descriptions for exact wording of text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers, except for a negative income from operations. Round percentages to the one decimal place. Colons will appear automatically. c. Interpret the product profitability report.