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Problem 7-19: Second Stage Allocations and Product Margins [LO7-4, LO7-5]

Pixel Studio, Inc. is a small company that creates computer-generated animations for films and television. The company's work includes short commercials for television and realistic computer animations for special effects in movies. The young founders of the company are concerned with the economics of the business, particularly as many competitors have emerged in the local area. To better understand the company's cost structure, an activity-based costing system has been implemented.

Three major activities are carried out in the company:

1. **Animation Concept**: Conducted at the contract proposal stage when the company bids on projects. This is an intensive activity involving individuals from all parts of the company in creating storyboards and prototype stills for the prospective client.

2. **Animation Production**: Once a project is accepted by the client, the animation goes into production. Most of the work in animation production is done by the technical staff.

3. **Contract Administration**: This begins after the animation production. The administrative staff is largely responsible for contract administration.

The activity cost pools and their activity measures are listed below:

- **Animation Concept**: Number of proposals, $5,200 per proposal
- **Animation Production**: Minutes of completed animation, $7,900 per minute
- **Contract Administration**: Number of contracts, $6,900 per contract

These activity rates include all company costs, except for organization-sustaining and idle capacity costs. There are no direct labor or direct materials costs.

Preliminary analysis using these activity rates suggests that the local commercial segment of the market may be unprofitable. This segment is highly competitive, with producers of local commercials often asking three or four companies like Pixel Studio to bid, resulting in a low ratio of accepted contracts to bids. Additionally, the animation sequences for local commercials tend to be much shorter, meaning revenues from these short projects are often below average.

Data concerning activity in the local commercial market is provided below.

Answer :

The Local commercial segment may be unprofitable due to competition, low bid acceptance, and short animation sequences. Activity-based costing aids profitability decisions.

Pixel Studio utilizes activity-based costing to understand its cost structure better. The three major activities - animation concept, animation production, and contract administration - have associated activity rates based on the number of proposals, minutes of completed animation, and number of contracts, respectively.

The analysis indicates that the local commercial market is highly competitive, leading to a low acceptance rate of bids. the shorter animation sequences for local commercials result in lower revenues. Armed with this information, Pixel Studio can explore strategies to improve profitability, such as targeting more profitable market segments or optimizing its cost allocation and pricing strategies.

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1. Animation concept: Number of proposals - $5,200 per proposal
2. Animation production: Minutes of completed animation - $7,900 per minute
3. Contract administration: Number of contracts - $6,900 per contract

Pixel Studio, Inc. uses an activity-based costing system to understand its cost structure. The company has three major activities: animation concept, animation production, and contract administration. The activity cost pools and their activity measures are:

1. Animation concept: This activity is carried out during the contract proposal stage when the company bids on projects. It involves creating storyboards and prototype stills to be shown to the prospective client. The cost of this activity is allocated based on the number of proposals, with a rate of $5,200 per proposal.
2. Animation production: Once a project is accepted, the animation goes into production. This activity is mainly done by the technical staff. The cost of animation production is allocated based on the minutes of completed animation, with a rate of $7,900 per minute.
3. Contract administration: This activity begins after a project is accepted and involves the administrative staff. The cost of contract administration is allocated based on the number of contracts, with a rate of $6,900 per contract.


By using activity-based costing, Pixel Studio can better understand the costs associated with each activity and determine the profitability of different market segments. Preliminary analysis suggests that the local commercial segment may be unprofitable due to intense competition, low ratio of accepted contracts to bids, and shorter animation sequences. This results in below-average revenues for these projects.

To know more about Pixel Studio , Visit:

https://www.brainly.com/question/15031640

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