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Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products generators and air compressors. The following report was prepared by the controller for Volt-Gear senior marketing management for the year ended December 31:

1		Generators	Air Compressors	Total
2	Revenue	$2,000,000.00	$1,400,000.00	$3,400,000.00
3	Cost of goods sold	1,400,000.00	980,000.00	2,380,000.00
4	Gross profit	$600,000.00	$420,000.00	$1,020,000.00
5	Cost of goods sold			353,000.00
6	Income from operations			$667,000.00

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	$ 80 per sales order
Post-sale customer service	Service requests	$300 per customer service request

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

	Generators	Air Compressors
Number of sales orders	980	1,160
Number of service requests	150	456

Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products generators and air compressors. The following report was prepared by the controller for Volt-Gear senior marketing management for the year ended December 31:

1		Generators	Air Compressors	Total
2	Revenue	$2,000,000.00	$1,400,000.00	$3,400,000.00
3	Cost of goods sold	1,400,000.00	980,000.00	2,380,000.00
4	Gross profit	$600,000.00	$420,000.00	$1,020,000.00
5	Cost of goods sold			353,000.00
6	Income from operations			$667,000.00

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	$ 80 per sales order
Post-sale customer service	Service requests	$300 per customer service request

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

	Generators	Air Compressors
Number of sales orders	980	1,160
Number of service requests	150	456

	Required:
A.	Determine the activity cost of each product for sales order processing and post-sale customer service activities.
B.	Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. 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 nearest tenth of a percent. Colons will appear automatically.

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Activity Costs

A. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

	Activity Cost
	Generators	Air Compressors	Total
Sales order processing activities
Post-sale customer
service activities

Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. 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 nearest tenth of a percent. Colons will appear automatically.

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Volt-Gear Inc.

Product Profitability Report

1		Generators	Air Compressors	Total
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9	Gross profit as a percentage of sales
10	Income from operations as a percentage of sales

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