Nourse Enterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning that ABC system are listed below: The cost of serving customers, $2,026.00 per customer, is the cost of serving a customer for one year. Koerner Corporation buys only one of the company's products. The details of last year's purchases of this product are listed below:
According to the ABC system, the customer margin for this customer this past year was closest to:
A) $14,670.00
B) $10,578.55
C) $16,020.00
D) $19,083.55

Question

Nourse Enterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning that ABC system are listed below:  The cost of serving customers, $2,026.00 per customer, is the cost of serving a customer for one year. Koerner Corporation buys only one of the company's products. The details of last year's purchases of this product are listed below:
 According to the ABC system, the customer margin for this customer this past year was closest to:
A) $14,670.00 
B) $10,578.55 
C) $16,020.00 
D) $19,083.55

Quizplus · Accepted Answer

First, we need to calculate the total cost incurred to serve this customer using the ABC system:

Product Level Cost Pool: $10 × 840 units = $8,400
Batch Level Cost Pool: ($40 × 12) ÷ 840 units = $0.57 per unit × 840 units = $478.80
Customer Level Cost Pool: $2,026.00 per customer = $2,026.00
Facility Level Cost Pool: $400,000 ÷ 20,000 machine hours = $20 per machine hour × 120 machine hours = $2,400

Total cost to serve this customer = $8,400 + $478.80 + $2,026.00 + $2,400 = $13,304.80

Next, we need to calculate the revenue earned from this customer:

$14 × 840 units = $11,760

Finally, we can calculate the customer margin:

Customer margin = Revenue - Cost to serve customer
Customer margin = $11,760 - $13,304.80
Customer margin = -$1,544.80

Since the customer margin is negative, the company lost money on this customer last year. The closest answer choice is B) $10,578.55.

Nourse Enterprises Makes a Variety of Products That It Sells