Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses

Naper Inc. manufactures power equipment. Naper has two primary productsgenerators 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	$1,599,200			$2,181,960		$3,781,160
Cost of goods sold	1,199,400			1,636,470		2,835,870
Gross profit	$399,800			$545,490		$945,290
Selling and administrative expenses						200,790
Income from operations						$744,500

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 shown below.

Activity	Activity Base			Activity Rate
Sales order processing	Sales orders		$90	per sales order
Post-sale customer service	Service requests		$260	per customer service request

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

	Generators		Air Compressors
Number of sales orders	308		727
Number of service requests	78		336

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

	Sales Order Processing Activities Cost		Post-sale Customer Service Activities Cost
Generators	$fill in the blank 1068b409ffcd041_1		$fill in the blank 1068b409ffcd041_2
Air Compressors	fill in the blank 1068b409ffcd041_3		fill in the blank 1068b409ffcd041_4
Total	$fill in the blank 1068b409ffcd041_5		$fill in the blank 1068b409ffcd041_6

b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. Round percentages to one decimal place. Enter all amounts as positive numbers.

Naper Inc.
Product Profitability Report
For the Year Ended December 31
	Generators	Air Compressors	Total
Revenues	$fill in the blank c0f186f71ffdf86_1	$fill in the blank c0f186f71ffdf86_2	$fill in the blank c0f186f71ffdf86_3
Cost of goods sold	fill in the blank c0f186f71ffdf86_4	fill in the blank c0f186f71ffdf86_5	fill in the blank c0f186f71ffdf86_6
Gross profit	$fill in the blank c0f186f71ffdf86_7	$fill in the blank c0f186f71ffdf86_8	$fill in the blank c0f186f71ffdf86_9
Sales order processing	$fill in the blank c0f186f71ffdf86_10	$fill in the blank c0f186f71ffdf86_11	$fill in the blank c0f186f71ffdf86_12
Post-sale customer service	fill in the blank c0f186f71ffdf86_13	fill in the blank c0f186f71ffdf86_14	fill in the blank c0f186f71ffdf86_15
Total selling and administrative expense	$fill in the blank c0f186f71ffdf86_16	$fill in the blank c0f186f71ffdf86_17	$fill in the blank c0f186f71ffdf86_18
Income from operations	$fill in the blank c0f186f71ffdf86_19	$fill in the blank c0f186f71ffdf86_20	$fill in the blank c0f186f71ffdf86_21
Gross profit as a percentage of sales	fill in the blank c0f186f71ffdf86_22%	fill in the blank c0f186f71ffdf86_23%
Income from operations as a percentage of sales	fill in the blank c0f186f71ffdf86_24%	fill in the blank c0f186f71ffdf86_25%

c. Interpret the product profitability report.

The air compressors have the income from operations to sales percentage because the product is a user of Napers sales and service activities. Many factors cause the air compressors to have income from operations as a percent of sales than generators