Problem 7-20 Evaluating the profitability of services

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PROBLEM 7-20 Evaluating the Profitability of Services L07-20. L07-3Q.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. Page 353 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 Activity Measure Cleaning carpets Square feet cleaned (00s) Travel to jobs Miles driven Job support Number of jobs Other (organization-sustaining costs and idle capacity costs) None Activity for the Year 20,000 hundred square feet 60,000 miles 2,000 jobs Not applicable The total cost of operating the company for the year is $430,000, which includes the following costs: Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses Presidents compensation Total cost $150,000 40,000 20,000 80,000 60,000 80.000 $430,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Travel to Carpets Jobs Wages 70% 20% Cleaning supplies 100% 0% Cleaning equipment depreciation 80% 0% Vehicle expenses 60% Office expenses 0% President's compensation 0% 0% Job Support Other Total 0% 10% 100% 0% 0% 100% 0% 20% 100% 0% 40% 100% 45% 55% 100% 40% 60% 100% 0% 0% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. 3. The company recently completed a 500 square foot carpet-cleaning job at the Flying N Rancha 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