PR 4-5A Allocating selling and administrative expenses using Obj. 5 activity-based costing Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Price $ 60,000 per unit Cost of goods sold (28,000) Gross profit $ 32,000 per unit In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engi- neering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are: Activity Budgeted Activity Cost Activity Base Customer service $ 31,500 Number of service requests Project bidding 74,000 Number of bids Engineering support 120,750 Number of customer design changes Total costs $226,250 Activity-base usage and unit volume information for the three customers is as follows: The Martin Gough Industries Breen Inc. Group Total Number of service requests 28 Number of bids 50 Number of customer design changes Unit volume 50 Instructions 1. Determine the activity rates for each of the three nonmanufacturing activity pools. 2. Determine the activity costs allocated to the three customers, using the activity rates in (1). 3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and operating income associated with each customer. 4. Provide recommendations to management, based on the profitability reports in (3). 36 116 95 108 4 40 35 16 180 185 161 18 30