3. Activity-Based Costing in a Service Environment Elite Lawn & Plowing (EL&P) is a lawn and snow plowing service with both residential and commercial clients. The owner believes that residential services has more growth opportunities and is considering dropping commercial services. Twenty employees worked a total of 20,000 hours last year, 13,000 on residential jobs and 7,000 on commercial jobs. Wages were $25 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. Because of the increased competition for commercial accounts, EL&P can charge $60 per hour for residential work, but only $45 per hour for commercial work. Required a. If overhead for the year was $205,000, what were the profits of the residential and commercial services using labor-hours as the allocation base? b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows: Cost Driver Volume Activity Cost Driver Cost Commercial Residential Traveling Number of clients served $ 25,000 24 76 Using equipment Equipment hours 60,000 1,775 1,225 Using supplies Area serviced in square yards 120,000 65,000 35,000 Total overhead $205,000 Recalculate profits for commercial and residential services based on these activity bases. c. What recommendations do you have for management regarding the profitability of these two types of services