7-20 Evaluating the Profitability of Services LO7-2, LO7-3, L07-4, L07-5 Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $28 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 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, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below. Activity Cost Pool Cleaning carpets Activity Measure Activity for the Year Square feet cleaned (00s) 20,000 hundred square feet Miles driven Travel to jobs Job support Number of jobs Other (organization-sustaining costs and idle capacity costs) None The total cost of operating the company for the year is $430,000, which includes the following costs 60,000 miles 2,000 jobs Not applicable Wages $150,000 Cleaning supplies 40,000 Cleaning equipment depreciation 20,000 Vehicle expenses 80,000 Office expenses 60.000 Presidents compensation 80,000 Total cost $430,000 Resource consumption is distributed across the activities as follows: Job Cleaning Travel to Carpets Jobs Support Other Total Wages 70% 20% 0% 10% 100% Cleaning supplies 100% 0% 0% 0% 100% Cleaning equipment depreciation 80% 0% 0% 20% 100% Vehicle expenses 0% 60% 0% 40% 100% Office expenses 0% 0% 45% 55% 100% President's compensation 0% 0% 40% 60% 100% Page 344 Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so c Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Using Exhibit 7-6 as a guide, prepare the first-stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-7 as a guide, compute the activity rates for the activity cost pools. 3. The company recently completed a 500 square foot carpet-cleaning job at the Flying N Ranch-a 75-mile round-trip journey from the company's offices in Bozeman. Compute the cost of this job using the activity-based costing system. 4. The revenue from the Flying N Ranch was $140 (500 square feet @ $28 per hundred square feet). Using Exhibit 7-12 as a guide, calculate the customer margin earned on this job. 5. What do you conclude concerning the profitability of the Flying N Ranch job? Explain. 6. What advice would you give the president concerning pricing jobs in the future? 1 Problem 7-20 2 A B G H 3 Costs 4 Wages $150,000 5 Cleaning supplies 40,000 6 Cleaning equipment depreciation 20,000 7 Vehicle expenses 80,000 8 Office expenses 60,000 9 President's compensation 80,000 11 Total costs 12 13 Activity Cost Pool 14 Cleaning carpets $430,000 Activity Measure Square feet cleaned (00s) Total Activity 15 Travel to jobs Miles driven 16 Job support Number of jobs 17 Other Organization-sustaining 20,000 hundred sq ft 60,000 miles 2,000 jobs N/A 18. Distribution of Resource Cleaning Travel to 19 Consumption carpets jobs Job support Other Total 20 Wages 70% 20% 0% 10% 100% 21 Cleaning supplies 100% 0% 0% 0% 100% 22 Cleaning equipment depreciation 80% 0% 0% 20% 100% 23 Vehicle expenses 0% 60% 0% 40% 100% 24 Office expenses 0% 0% 45% 55% 100% 25 President's compensation 0% 0% 40% 60% 100% 26 27 Flying N Ranch job: (Information in Question 3 & 4) 28 29 30 1 32 3 4 5 1. Perform the first stage allocations of overhead costs to the activity pools 6 7 Wages Costs Cleaning carpets Travel to jobs Job support Other Total 8 Cleaning Supplies 9 Cleaning Equipment Depreciation 0 Vehicle Expenses 1 Office Expense 42 President's Compensation 44 Total cost 45 16 2. Compute the activity rates for each activity cost pool 47 48 Activity Cost Pools 49 Cleaning Carpets 50 Travel to Jobs Total Cost Total Activity Activity Rate 51 Job Support 52 53 3. Compute the overhead cost attributable to the Flying N Ranch job 54 55 Activity Cost Pools 56 Cleaning Carpets Activity Rate 57 Travel to Jobs 58 Job Support 60 OT Total 62 Activity ABC Cost 63 4. Determine the customer margin for the Flying N Ranch job using Activity-Based Costing 64 65 66 67 co 70 71 72 Question 5 in textbook: 73 74 75 ,76 77 78 79 80 81 Question 6 in textbook: 82 83 84. 85 86 87 88 89 90 91 92 02