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	$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

Question Content Area

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 3a0c1eff6f97041_1		$fill in the blank 3a0c1eff6f97041_2
Air Compressors	fill in the blank 3a0c1eff6f97041_3		fill in the blank 3a0c1eff6f97041_4
Total	$fill in the blank 3a0c1eff6f97041_5		$fill in the blank 3a0c1eff6f97041_6

Question Content Area

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 two decimal places. 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 78f71dfcd06702a_1	$fill in the blank 78f71dfcd06702a_2	$fill in the blank 78f71dfcd06702a_3
Cost of goods sold	fill in the blank 78f71dfcd06702a_4	fill in the blank 78f71dfcd06702a_5	fill in the blank 78f71dfcd06702a_6
Gross profit	$fill in the blank 78f71dfcd06702a_7	$fill in the blank 78f71dfcd06702a_8	$fill in the blank 78f71dfcd06702a_9
Sales order processing	$fill in the blank 78f71dfcd06702a_10	$fill in the blank 78f71dfcd06702a_11	$fill in the blank 78f71dfcd06702a_12
Post-sale customer service	fill in the blank 78f71dfcd06702a_13	fill in the blank 78f71dfcd06702a_14	fill in the blank 78f71dfcd06702a_15
Total selling and administrative expense	$fill in the blank 78f71dfcd06702a_16	$fill in the blank 78f71dfcd06702a_17	$fill in the blank 78f71dfcd06702a_18
Income from operations	$fill in the blank 78f71dfcd06702a_19	$fill in the blank 78f71dfcd06702a_20	$fill in the blank 78f71dfcd06702a_21
Gross profit as a percentage of sales	fill in the blank 78f71dfcd06702a_22%	fill in the blank 78f71dfcd06702a_23%
Income from operations as a percentage of sales	fill in the blank 78f71dfcd06702a_24%	fill in the blank 78f71dfcd06702a_25%

Question Content Area

c. Interpret the product profitability report.

The air compressors have the

higherlower

income from operations to sales percentage because the product is a

light/heavy

user of Napers sales and service activities. Many factors cause the air compressors to have

less/more

income from operations as a percent of sales than generators.