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Ellie Mosk, CEO of X-Space Industries, decided to expand thecompany’s product offering beyond the core model rocket business.After investigation, she decided to set up a separate division todesign and manufacture products for the drone market. Severalcompanies were interested in having X-Space develop these drones,and financial results, to date, have been encouraging. Revenue was$4 million, gross margins have been running about 40%, and thecustomer sales and support costs were $1 million. However, there isa growing concern that some customers require a disproportionateshare of the sales and support resources, and the trueprofitability of the customers is unknown. Data were collected tosupport an analysis of customer profitability:

Activity	Cost Driver	Total Cost
Sales visits	Sales visit days	$	488,000
Product modifications	Number of modifications		272,000
Phone calls	Number of minutes		93,200
E-mail/electronic communications	Number of communications		174,000
		$	1,027,200

Customer	Revenue				Gross Profit				Visit Days				Modifications				Phone Minutes				ElectronicCommunications
A	$	402,000			$	152,000				15				15				1,150				625
B		502,000				202,000				25				15				1,240				875
C		602,000				232,000				40				40				1,490				1,120
D		1,120,000				422,000				90				60				1,840				2,120
E		1,520,000				592,000				100				70				2,240				2,370
Totals	$	4,146,000			$	1,600,000				270				200				7,960				7,110

Required:

1. Management felt the easiest way to allocate the sales andsupport costs was based on the total revenue. Using total revenueas the allocation base, determine the profitability of each of thefive customers.

2. Management felt that because the data revealed some customersrequire a disproportionate share of sales and support resources,activity-based costing should be used to determine customerprofitability. Use ABC to prepare a customer profitabilityanalysis.