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Allocating Selling and Administrative Expenses using Activity-Based Costing

Western Mechanical Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

Price	$660 per unit
Cost of goods sold	400
Gross profit	$260	per unit

In addition, the company incurs selling and administrative expenses of $266,830. The company wishes to assign these costs to its three major customers, Coastal Atlantic University, Celebrity Arena, and Hope Hospital. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity basesassociated with these activities are:

Activity		Budgeted Activity Cost		Activity Base
Customer service		$45,210		Number of service requests
Project bidding		33,120		Number of bids
Engineering support		188,500		Number of customer design changes
	Total costs	$266,830

Activity-base usage and unit volume information for the three customers is as follows:

	Coastal Atlantic University			Celebrity Arena		Hope Hospital		Total
Number of service requests	70			10		250		330
Number of bids	260			110		550		920
Number of customer design changes	20			10		100		130
Unit volume	610			610		610		1,830

Required:

Hint(s)

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Round to the nearest whole dollar.

	Activity Rate
Customer Service	$	per serv. req.
Project bidding	$	per bid
Engineering Support	$	per customer design change

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

	Activity Costs
Coastal Atlantic University	$
Celebrity Arena	$
Hope Hospital	$ 3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2014, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations Western Mechanical Inc. Customer Profitability Report For the Year Ended December 31, 2014 Coastal Atlantic University Celebrity Arena Hope Hospital Revenues $ $ $

Less cost of goods sold
Gross profit		$		$		$
Less selling and administrative activities:
Customer service		$		$		$
Project bidding
Engineering support
		$		$		$
Income (loss) from operations		$		$		$

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