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  1. Allocating Selling and Administrative Expenses using Activity-Based Costing

    Shrute Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

    Price $670 per unit
    Cost of goods sold 400
    Gross profit $270 per unit

    In addition, the company incurs selling and administrative expenses of $290,680. The company wishes to assign these costs to its three major retail customers, The Warehouse, Kosmo Co., and Supply Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Shrute Inc. to support the retailer's sale of Shrute copiers to consumers. The budgeted activity costs and activity bases associated with these activities are:

    Activity Budgeted Activity Cost Activity Base
    Customer service $29,400 Number of service requests
    Sales order processing 21,580 Number of sales orders
    Advertising support 239,700 Number of ads placed
    Total activity cost $290,680

    Activity-base usage and unit volume information for the three customers is as follows:

    The Warehouse Kosmo Co. Supply Universe Total
    Number of service requests 40 10 160 210
    Number of sales orders 230 100 500 830
    Number of ads placed 20 20 130 170
    Unit volume 640 640 640 1,920

    Required:

    1. Determine the activity rates for each of the three nonmanufacturing activities. Round to the nearest whole dollar.

    Activity Rate
    Customer Service $ per serv. req.
    Sales Order Processing $ per bid
    Advertising Support $ per customer design change

    2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

    Activity Costs
    The Warehouse $
    Kosmo Co. $
    Supply Universe $

    3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2016, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations.

    Shrute Inc.
    Customer Profitability Report
    For the Year Ended December 31
    The Warehouse Kosmo Co. Supply Universe
    Revenues $ $ $
    Cost of goods sold
    Gross profit $ $ $
    Selling and administrative activities:
    Customer service $ $ $
    Sales order processing
    Advertising support
    Total selling and administrative activities $
    Income (loss) from operations $ $ $
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