Construct and Interpret a Product Profitability Report,Allocating Selling and Administrative Expenses
Naper Inc. manufactures power equipment. Naper has two primaryproducts—generators and air compressors. The following report wasprepared by the controller for Naper's senior marketing managementfor the year ended December 31:
| Generators | AirCompressors | Total |
| Revenue | $4,200,000 | | | $3,000,000 | | $7,200,000 | |
| Cost of goods sold | 2,940,000 | | | 2,100,000 | | 5,040,000 | |
| Gross profit | $1,260,000 | | | $900,000 | | $2,160,000 | |
| Selling and administrative expenses | | | 610,000 | |
| Income from operations | | | $1,550,000 | |
The marketing management team was concerned that the selling andadministrative expenses were not traced to the products. Marketingmanagement believed that some products consumed larger amounts ofselling and administrative expense than did other products. Toverify this, the controller was asked to prepare a complete productprofitability report, using activity-based costing.
The controller determined that selling and administrativeexpenses consisted of two activities: sales order processing andpost-sale customer service. The controller was able to determinethe activity base and activity rate for each activity, asfollows:
| 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 usageinformation about each product:
| Generators | Air Compressors |
| Number of sales orders | 3,000 | | 4,000 | |
| Number of service requests | 225 | | 550 | |
a. Determine the activity cost of each productfor sales order processing and post-sale customer serviceactivities.
| Sales Order Processing
Activities Cost | | Post-sale Customer Service
Activities Cost |
| Generators | $ | | $ |
| Air Compressors | | | |
| Total | $ | | $ |
Feedback
a. Calculate for each product:
Activity-Base Usage x Activity Rate = Activity Cost. Add both coststo obtain the total for each activity.
Learning Objective 5.
b. Use the information in (a) to prepare acomplete product profitability report dated for the year endedDecember 31. Calculate the gross profit to sales and the incomefrom operations to sales percentages for each product. Roundpercentages to two decimal places. Enter all amounts as positivenumbers.
| Naper Inc. |
| Product Profitability Report |
| For the Year Ended December 31 |
| Generators | Air Compressors | Total |
| Revenues | $ | $ | $ |
| Cost of goods sold | | | |
| Gross profit | $ | $ | $ |
| Sales order processing | $ | $ | $ |
| Post-sale customer service | | | |
| Total selling and administrative expense | $ | $ | $ |
| Income from operations | $ | $ | $ |
| Gross profit as a percentage of sales | % | % | |
| Income from operations as a percentage of sales |
