Evaluating the Profitability of Services [LO2, LO3, LO4, LO5]

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a fl at fee per hundred square feet of carpet cleaned. The current fee is $22.95 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

The total cost of operating the company for the year is $340,000, which includes the following costs:

Resource consumption is distributed across the activities as follows:

Job support consists of receiving calls from potential customers at the home offi ce, scheduling jobs, billing, resolving issues, and so on.
Required:
1. Using Exhibit 7–5 as a guide, prepare the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 7–6 as a guide, compute the activity rates for the activity cost pools.
3. The company recently completed a 6 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch—a 52-mile round-trip from the company’s offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system.
4. The revenue from the Lazy Bee Ranch was $137.70 (6 hundred square-feet at $22.95 per hundred square feet). Using Exhibit 7–11 as a guide, prepare a report showing the margin from this job.
5. What do you conclude concerning the profitability of the Lazy Bee Ranch job? Explain.
6. What advice would you give the president concerning pricing jobs in the future?

Transcribed Image Text:

Activity Cost Pool Cleaning carpets. Travel to jobs... Job support Other (organization-sustaining and idle capacity costs).. Activity Measure Activity for the Year Square feet cleaned (00s) 10,000 hundred square feet Miles driven Number of jobs None 50,000 miles 1,800 jobs Not applicable