IE4-2 Using an Activity Based Costing System to Determine Customer Profitability Merdian Tracer Company is evaluating some of its larger clients. Some of the management believes that certain clients are not as profitable as others due to some of the period costs associated with each customer. Some of these customers may even be costing the company money. Management is interested in a customer cost analysis, but there is some debate as to whether or not Activity Based Costing would apply to this situation. Customer Service Shipping Out Customer List Pluto Partners Jupiter Giants Driver Mars Men $ 965,000 $ 2,500,000 $ 450,000 $ 2,500,000 Activity Order Processing Purchase Orders Repair Processing Service Calls Product Returns Returns Processing Customer Inquiries Shipment Invoices Customer Gross Profit Purchase Orders Service Calls 80 20 Returns Processing 5 Customer Inquiries 12 Shipment Invoices 15 Due to the size of these customers, the accounting department was easily able to procure cost information directly related to these specific clients: 200 60 25 40 3 Total Cost $ 500,000 800,000 1,800,000 Venus Village 800,000 1,100,000 $5,000,000 10 2 5 3 5 Mercury Managers $ 1,250,000 100 150 120 20 80 Total $7,665,000 40 30 10 15 25 430 262 165 90 128 Required: 1. Calculate the Predetermined Overhead Rate if management believes that Order Processing is the main cost driver. 2. Use the Predetermined Overhead Rate from Requrement 1 to determine the profitability of each customer. 3. Use Activity Based Costing to determine the Activity Rates for each customer activity. 4. Use the Activity Rates to calculate the profitability of each customer.

IE4-2 Using an Activity Based Costing System to Determine Customer Profitability Merdian Tracer Company is evaluating some of its larger clients. Some of the management believes that certain clients are not as profitable as others due to some of the period costs associoted with each customer. Some of these customers may even be costing the company money. Management is interested in a customer cost analysis, but there is some dobate as to whether or not Activity Based Costing would apply to this situation. Due to the size of these customers, the accounting department was easily adie to procure cost inrormation cirectly related to these specific clients: Required: 1. Calculate the Predetermined Overhead Rate if manogement believes that Order Processing is the main cost driver. 2. Use the Predetermined Overhead Rate from Requrement 1 to determine the profitability of each customer. 3. Use Activity Based Costing to determine the Activity Rates for each customer activity. 4. Use the Activity Rates to calculate the profitablity of each customer. Merdian Tracer Company is evaluating some of its larger clients. Some of the management belleves that certain clients are not as profitable as others due to some of the period costs associated with each customer. Some of these customers may even be costing the company money. Management is interested in a customer cost analysis, but there is some debate as to whether or not Activity Based Costing would apply to this situation. 1. Calculate the Predetermined Overhead Rate if management believes that Order Processing is the main cost driver. 2. Use the Predetermined Overhead Rate from Requrement 1 to determine the profitability of each customer. 3. Use Activity Based Costing to determine the Activity Rates for each customer activity. 4. Use the Activity Rates to calculate the profitability of each customer