Construct and Interpret a Product Profitability Report, AllocatingSelling 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 Air Compressors Total
Revenue $1,796,440 $2,752,720 $4,549,160
Cost of goods sold 1,347,330 2,064,540 3,411,870
Gross profit $449,110 $688,180 $1,137,290
Selling and administrative expenses 246,690
Income from operations $890,600

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 A measure of activity that is related to changes in cost. Usedin analyzing and classifying cost behavior. Activity bases are alsoused in the denominator in calculating the predetermined factoryoverhead rate to assign overhead costs to cost objects.activitybase and The cost of an activity per unit of activity base,determined by dividing the activity cost pool by the activitybase.activity rate for each activity, as shown below.

Activity Activity Base Activity Rate
Sales order processing Sales orders $90 per sales order
Post-sale customer service Service requests $270 per customerservice request

The controller determined the following activity-base usageinformation about each product:

Generators Air Compressors
Number of sales orders 398 840
Number of service requests 67 434

a. Determine the activity cost of each product for sales orderprocessing and post-sale customer service activities.

Sales Order Processing
Activities Cost Post-sale Customer Service
Activities Cost
Generators $ $
Air Compressors
Total $ $

b. Use the information in (a) to prepare a complete productprofitability report dated for the year ended December 31.Calculate the gross profit to sales and the income from operationsto sales percentages for each product. Round percentages to onedecimal place. Enter all amounts as positive numbers.

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 % %

c. Interpret the product profitability report.

The air compressors have the

higher
lower

income from operations to sales percentage because the productis a

light
heavy

user of Naper’s sales and service activities. Many factors causethe air compressors to have

less
more

income from operations as a percent of sales than generators