Landscape, Inc., is a lawn and garden service. The company originally specialized in serving small residential clients; recently it has started contracting for work on larger office building grounds.

Employees worked a total of 10,000 hours last year, 6,500 on residential jobs and 3,500 on commercial jobs. Wages amounted to $10 per hour for all work done. Materials used are included in overhead and called supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Landscape, Inc., can charge $30 per hour for residential work but, because of greater competition for commercial accounts, only $20 per hour for commercial work.

a) Using labor-hours as the basis for allocating overhead, what was the gross margin (revenues minus labor and overhead expense) for (1) commercial and (2) residential service? Assume overhead was $50,000.

b) Overhead consists of transportation, lawn mowing and landscaping equipment costs, depreciation on equipment, supplies, fuels, and maintenance. These costs can be traced to the following activities:

Activity	Cost Driver	Cost	Commercial	Residential
Transportation	Clients served	$10,000	15	45
Equipment Costs
Fuel, maintenance, depreciation	Equipment hours	25,000	3000	2000
Supplies	Square yard serviced per year	15,000	100,000	50,000
Total overhead		$50,000

Recalculate gross margin for commercial and residential services based on these cost driver bases.

c. Would you advise Landscape, Inc., to drop either the residential or commercial service based on your analysis? Explain.