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Foam Products, Inc., makes foam seat cushions for the automotive and aerospace industries. The company’s activity-based costing system has four activity cost pools, which are listed below along with their activity measures and activity rates: Activity Cost Pool Activity Measure Activity Rate Supporting direct labor Number of direct labor-hours $ 5.55 per direct labor-hour Batch processing Number of batches $ 107.00 per batch Order processing Number of orders $ 275.00 per order Customer service Number of customers $ 2,463.00 per customer The company just completed a single order from Interstate Trucking for 1,000 custom seat cushions. The order was produced in two batches. Each seat cushion required 0.25 direct labor-hours. The selling price was $20 per unit, the direct materials cost was $8.50 per unit, and the direct labor cost was $6.00 per unit. This was Interstate Trucking’s only order during the year. Required: Prepare a report showing the customer margin on sales to Interstate Trucking for the year.

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Answer:

Report Showing Customer Margin

Interstate Trucking

Sales value for 1,000 custom seat cushion = $20 X 1,000                 $20,000

Less: Direct material = $8.5 X 1,000 units                                            ($8,500)

Less: Direct labor = $6 X 1,000 units                                                     ($6,000)

Less: Batch processing $107 X 2 batches                                               ($214)

Less: Direct labor hours = 1 hour/0.25 = 4 units in an hour

          Total = ($1,000/4) X $5.55 per labor hour                                   ($1,387.5)

Less: Order processing, cost per order                                                    ($275)

Less: Customer service, per customer                                                     ($2,463)

Profit on this customer                                                                              $1,160.5

Customer margin = ( $1,160.5/$20,000 )* 100 = 5.80%

   

The calculate the customer margin on sales is 5.80%.

How to calculate the customer margin on sales?

From the information given, the following can be deduced:

Sales value for 1,000 custom seat cushion = $20 × 1,000 = $20,000

Less: Direct material = $8.5 × 1,000 units = $8500

Less: Direct labor = $6 × 1,000 = $6000

Less: Batch processing = $107 × 2 = ($214)

Less: Direct labor hours = 1 hour/0.25 = 4 units in an hour

Total = ($1,387.5)

Less: Order processing cost = ($275)

Less: Customer services = ($2,463)

Therefore, the profit on this customer will be $1,160.5. Then, the customer margin will be:

= $1,160.5/$20,000 × 100

= 5.80%

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