Construct and interpret a product profitability report, allocating selling and administrative expenses Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper’s senior marketing management for the year ended December 31: Generators Air Compressors Total Revenue $4,200,000 $3,000,000 $7,200,000 Cost of goods sold 2,940,000 2,100,000 5,040,000 Gross profit $1,260,000 $ 900,000 $2,160,000 Selling and administrative expenses 610,000 Income from operations $1,550,000 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 $ 65 per sales order Post-sale customer service Service requests $200 per customer service request The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 3,000 4,000 Number of service requests 225 550 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. Compute the gross profit to sales and the income from operations to sales percentages for each product. (Round to two decimal places.) C. Interpret the product profitability report. How should management respond to the report?

BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

Solutions

Chapter
Section
Chapter 18, Problem 18.18EX
Textbook Problem

Construct and interpret a product profitability report, allocating selling and administrative expenses

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

  Generators Air Compressors Total
Revenue $4,200,000 $3,000,000 $7,200,000
Cost of goods sold 2,940,000 2,100,000 5,040,000
Gross profit $1,260,000 $ 900,000 $2,160,000
Selling and administrative expenses     610,000
Income from operations     $1,550,000

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 $ 65 per sales order
Post-sale customer service Service requests $200 per customer service request

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

  Generators Air Compressors
Number of sales orders 3,000 4,000
Number of service requests 225 550

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. Compute the gross profit to sales and the income from operations to sales percentages for each product. (Round to two decimal places.)

C. Interpret the product profitability report. How should management respond to the report?

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 18 Solutions

Financial & Managerial Accounting
Ch. 18 - Single plantwide factory overhead rate The total...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing: factory overhead costs The...Ch. 18 - Activity-based costing: selling and administrative...Ch. 18 - Activity-based costing for a service business...Ch. 18 - Single plantwide factory overhead rate Nixon...Ch. 18 - Single plantwide factory overhead rate Mozart...Ch. 18 - Single plantwide factory overhead rate Sally...Ch. 18 - Product costs and product profitability reports,...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Identifying activity bases in an activity-based...Ch. 18 - Product costs using activity rates Nozama.com Inc....Ch. 18 - Product costs using activity rates Atlas...Ch. 18 - Activity rates and product costs using...Ch. 18 - Activity cost pools, activity rates, and product...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Single plantwide rate and activity-based costing...Ch. 18 - Evaluating selling and administrative cost...Ch. 18 - Construct and interpret a product profitability...Ch. 18 - Activity-based costing and customer profitability...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Single plantwide factory overhead rate Orange...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based and department rate product costing...Ch. 18 - Activity-based product costing Mello Manufacturing...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Single plantwide factory overhead rate Spoiled Cow...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based department rate product costing and...Ch. 18 - Activity-based product costing Sweet Sugar Company...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Activity-based product cost improvement Gourmet...Ch. 18 - Labor classification trade-off Skidmore...Ch. 18 - Production run size and activity improvement...Ch. 18 - Hospital activity-based costing analysis Lancaster...Ch. 18 - Ethics in Action The controller of Tri Con Global...Ch. 18 - Communication The controller of New Wave Sounds...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Describe the three general categories of franchising arrangements.

Foundations of Business (MindTap Course List)

What is a correcting entry?

College Accounting, Chapters 1-27

DuPONT AND ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are 100 million, and...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Explain why payroll processing centers and electronic systems are commonly used in payroll accounting.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)