Second-Stage Allocation [LO6–4]
Klumper Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:
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| Activity Cost Pool | Activity Rates |
| Supporting direct labor. . . . . . . . . . . . . . . . . . . . . . | $6.00 per direct labor-hour |
| Machine processing . . . . . . . . . . . . . . . . . . . . . . . . | $4.00 per machine-hour |
| Machine setups . . . . . . . . . . . . . . . . . . . . . . . . . . . | $50.00 per setup |
| Production orders. . . . . . . . . . . . . . . . . . . . . . . . . | $90.00 per order |
| Shipments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $14.00 per shipment |
| Product sustaining . . . . . . . . . . . . . . . . . . . . . . . . | $840.00 per product |
Activity data have been supplied for the following two products:
| Total Expected Activity | |||
| K425 | M67 | ||
| Number of units produced per year. . . . | 200 | 2,000 | |
| Direct labor-hours . . . . . . . . . . . . . . . . . . | 80 | 500 | |
| Machine-hours. . . . . . . . . . . . . . . . . . . . . | 100 | 1,500 | |
| Machine setups . . . . . . . . . . . . . . . . . . . . | 1 | 4 | |
| Production orders. . . . . . . . . . . . . . . . . . . | 1 | 4 | |
| Shipments. . . . . . . . . . . . . . . . . . . . . . . . . | 1 | 10 | |
| Product sustaining . . . . . . . . . . . . . . . . . . | 1 | 1 |
Required:
Determine the total overhead cost that would be assigned to each of the products listed above in the activity-based costing system.
EXERCISE 6–5 Product and Customer Profitability Analysis [LO6–4, LO6–5]
Thermal Rising, 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 direct labor. . . . . . . . . . . . . . . | $26 per direct labor-hour |
| Order processing . . . . . . . . . . . . . . . . . . . | $284 per order |
| Custom design processing. . . . . . . . . . . | $186 per custom design |
| Customer service . . . . . . . . . . . . . . . . . . | $379 per customer |
Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months:
| Standard Model | Custom Design | |
| Number of gliders. . . . . . . . . . . . . . . . . . . . . | 20 | 3 |
| Number of orders . . . . . . . . . . . . . . . . . . . . . | 1 | 3 |
| Number of custom designs . . . . . . . . . . . . . | 0 | 3 |
| Direct labor-hours per glider. . . . . . . . . . . . | 26.35 | 28.00 |
| Selling price per glider . . . . . . . . . . . . . . . . | $1,850 | $2,400 |
| Direct materials cost per glider . . . . . . . . . | $564 | $634 |
The company’s direct labor rate is $19.50 per hour.
Required:
Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters.
EXERCISE 7–2 Dropping or Retaining a Segment [LO 7–2]
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
1. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer.
2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.