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 $1,796,440 $2,752,720 $4,549,160 Cost of goods sold 1,347,330 2,064,540 3,411,870 Gross profit $449,110 $688,180 $1,137,290 Selling and administrative expenses 246,690 Income from operations $890,600

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 A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior. Activity bases are also used in the denominator in calculating the predetermined factory overhead rate to assign overhead costs to cost objects.activity base and The cost of an activity per unit of activity base, determined by dividing the activity cost pool by the activity base.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 $270 per customer service request

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

Generators Air Compressors Number of sales orders 398 840 Number of service requests 67 434

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 $ $ Air Compressors Total $ $

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 $ $ $ Cost of goods sold Gross profit $ $ $ Sales order processing $ $ $ Post-sale customer service Total selling and administrative expense $ $ $ Income from operations $ $ $ Gross profit as a percentage of sales % % Income from operations as a percentage of sales % %

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