Using Activity Based Costing for the allocation of operation expenses of Alberto Company compute the operation profit or loss made from customer Selma Company

Using Activity Based Costing for the allocation of operation expenses of Alberto Company compute the operation profit or loss made from customer Zillow Company

Alberto Company buys a product called Zoom at $15 each and sells it at $20 per unit. Company management has become interested in measuring the profitability of two of its customers for marking purposes. In response to management information needs, the accountant has prepared the following Customer Profitability Report in which operating expenses are allocated based upon sales revenues (4.5% of net sales revenues), Customer Profitability Report Zillow Company Sales Units Selling Price Selma Company 20,000 $20.00 22,000 $20.00 Sales $400,000.00 $440,000.00 Cost of Goods Sold 1515 per unit) $300,000.00 $330,000.00 Gross Profit $100,000.00 $110,000.00 Operating expenses (4.5% of net sales $18.000.00 $19.800.00 Operating profit $82.000.00 $90,200.00 However, Lisa, the new accountant who is a graduate of CSU, has questioned the validity of the above customer profitability report. Specifically, she has questioned the way the operating expense amount is allocated among the two customers. She believes that given conditions associated with each of the two customers, the amount of operating services utilized by the two customers are not the same, each requiring different levels of operating services Accordingly, Lisa believes that company should use Activity Based Costing for the allocation of the operating costs among the customers for profitability analysis purpose Based upon examination of the records, Lisa was able to identify three main operating activities deriving the operating expenses as follows: Activity Cost Driver and Rate Sales calls cost (paid to $800 per visit salespeople) Order processing cost $300 per order plus $0.40 per unit/each order Delivery cost $250 per order plus $0.50 per mile Lisa has gathered the following data pertaining to operating activities performed for Selma and Zillow customers: Selma Zillow Company Company Number of sales calls 4 Number of Orders 4 11 Number of units per order 5,000 2.000 Miles per delivery 100 miles 280 miles