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	$2,126,800			$2,824,750		$4,951,550
Cost of goods sold	1,701,440			2,259,800		3,961,240
Gross profit	$425,360			$564,950		$990,310
Selling and administrative expenses						209,310
Income from operations						$781,000

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 shown below.

Activity	Activity Base			Activity Rate
Sales order processing	Sales orders		$80	per sales order
Post-sale customer service	Service requests		$210	per customer service request

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

	Generators		Air Compressors
Number of sales orders	423		768
Number of service requests	82		461

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 257c82033f9000f_1		$fill in the blank 257c82033f9000f_2
Air Compressors	fill in the blank 257c82033f9000f_3		fill in the blank 257c82033f9000f_4
Total	$fill in the blank 257c82033f9000f_5		$fill in the blank 257c82033f9000f_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 7a4a40079f9e076_1	$fill in the blank 7a4a40079f9e076_2	$fill in the blank 7a4a40079f9e076_3
Cost of goods sold	fill in the blank 7a4a40079f9e076_4	fill in the blank 7a4a40079f9e076_5	fill in the blank 7a4a40079f9e076_6
Gross profit	$fill in the blank 7a4a40079f9e076_7	$fill in the blank 7a4a40079f9e076_8	$fill in the blank 7a4a40079f9e076_9
Sales order processing	$fill in the blank 7a4a40079f9e076_10	$fill in the blank 7a4a40079f9e076_11	$fill in the blank 7a4a40079f9e076_12
Post-sale customer service	fill in the blank 7a4a40079f9e076_13	fill in the blank 7a4a40079f9e076_14	fill in the blank 7a4a40079f9e076_15
Total selling and administrative expense	$fill in the blank 7a4a40079f9e076_16	$fill in the blank 7a4a40079f9e076_17	$fill in the blank 7a4a40079f9e076_18
Income from operations	$fill in the blank 7a4a40079f9e076_19	$fill in the blank 7a4a40079f9e076_20	$fill in the blank 7a4a40079f9e076_21
Gross profit as a percentage of sales	fill in the blank 7a4a40079f9e076_22%	fill in the blank 7a4a40079f9e076_23%
Income from operations as a percentage of sales	fill in the blank 7a4a40079f9e076_24%	fill in the blank 7a4a40079f9e076_25%

c. Interpret the product profitability report.

The air compressors have the higher/lower 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.

with explanation