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Customer Profitability Analysis?Colleen Company has gathered the following data pertaining to activities it performed for two of its major customers.

Jerry, Inc. Kate Co.

Number of orders 5 30

Units per order 1,000 200

Sales returns:

Number of returns 2 5

Total units returned 40 175

Number of sales calls 12 4

Colleen sells its products at $200 per unit. The firm's gross margin ratio is 25%. Both Jerry and Kate pay their accounts promptly and no accounts receivable is over 30 days. After using business analytics software to carefully analyze the operating data for the past 30 months, the firm has determined the following activity costs:

Activity Cost Driver and Rate

Sales calls $1,000 per visit

Order processing 300 per order

Deliveries 500 per order

Sales returns 100 per return and $5 per unit returned

Sales salary 100,000 per month

Required

1. Using customers as the cost objects, classify the activity costs into cost categories (unit-level, batch-level, etc.) and compute the total cost for Colleen Company to service Jerry, Inc. and Kate Co.
2. Compare the profitability of these two customers. (Ignore the cost of funds.)

5-28

Activity-Based Costing Hakara Company has been using direct labor costs as the basis for assigning overhead to its many products. Under this allocation system, product A has been assigned overhead of $10.80 per unit, while product B has been assigned $3.60 per unit. Management feels that an ABC system will provide a more accurate allocation of the overhead costs and has collected the following cost pool and cost driver information:

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