Heidt Cleaning Services (HCS) is a local custodial service company serving both the residential and commercial markets. The owner is considering dropping the commercial clients because that business seems only marginally profitable.

Twenty-five employees worked a total of 37,500 hours last year, 25,000 on commercial jobs and 12,500 on residential jobs. Wages were $20 per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Given current economic conditions and competition, HCS bills residential clients $40 per hour and commercial clients $30 per hour.

Required

a. If overhead for the year was $337,500, what were the profits of the residential and commercial services using labor-hours as the allocation base?

b. Overhead consists of costs of supervision, equipment used (including vehicle rental), and supplies used, which can be traced as follows:  

Recalculate profits for commercial and residential services based on these activity bases. 

c. What recommendations do you have for management regarding dropping the commercial clients?

Transcribed Image Text:

Cost Driver Number of clients served Activity Supervision Equipment depreciation and lease. Equipment hours 155,500 Miscellaneous supplies... Area serviced in square yards 140,000 Total overhead..... $337,500 ******... Cost $ 42,000 Cost Driver Volume Commercial Residential 20 3,000 76,000 64 2,000 36,000