After attending a seminar on measuring customer profitability, Mason Ford decided to examine Olson Optics' customers to determine if the company truly knew how profitable its customers were.

Olson Optics already uses an activity-based costing system to determine the product cost of its two products: RF30 and LF45. Each RF30 sells for $15.00 and requires $7.05 in direct materials and $4.00 in direct labor. Each LF45 sells for $50.00 and requires $15.45 in direct materials and $14.00 in direct labor. The following table provides cost and activity information for manufacturing overhead for the two products.

Based on what Ford learned at the seminar, he has gathered the following information about customer support activities.

Ford wants to apply his new profitability analysis techniques to Infrared Technologies, a company he believes is representative of Olson's average customer. Information about Infrared's account activity is as follows.
RF30 purchases .....10,000 units
LF45 purchases .....3,000 units
Orders placed ......300
Customer support .....500 hours
Sales calls 24
Express shipments 250

Required

a. Calculate the activity-based product cost for RF30 and LF45.
b. Calculate the cost pool rates for Olson's customer service activities.
c. Calculate the gross profit, customer net profit, and customer profit margin for Infrared Technologies.
d. Is Infrared Technologies a profitable customer? Why or why not?
e. What actions could Ford take to increase Infrared Technologies' profitability? Should these actions be applied to all of Olson'scustomers?

Number of Activities Manufacturing Overhead Costs Activity Cost Pool Packing Setup Assembly Finishing Cost Driver Cartons Setup hours Spot welds Machine hours RF30 500,000 10,000 125,000 25,000 LF45 Total $ 200,000 450,000 730,000 300,000 300,000 800,000 27,500 37,500 240,000 365,000 75,000 100,000 Total manufacturing overhead costs $1,680,000 Units produced 600,000 200,000 Activity Cost Pool Order entry Customer support Sales calls Express shipping Cost Driver Orders Support hours Sales calls Shipments Selling Costs $200,000 150,000 250,000 140,000 $740,000 Driver Volume 40,000 5,000 2,000 7,000 Total selling costs