QUESTION 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 $22.90 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customersparticularly 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 Activity Measure Activity for the Year

Cleaning carpets Square feet cleaned (00s) 7,500hundred square feet

Travel to jobs Miles driven 285,500miles

Job support Number of jobs 2,000jobs

Other (organization-sustaining costs and

idle capacity costs) None Not applicable

The total cost of operating the company for the year is $360,000 which includes the following costs:

Wages $144,000

Cleaning supplies 31,000

Cleaning equipment depreciation 6,000

Vehicle expenses 36,000

Office expenses 66,000

President's compensation 77,000

Total cost $360,000

Resource consumption is distributed across the activities as follows:

Cleaning Travel to Job

Carpets Jobs Support Other Total

Wages 77% 14% 0% 9% 100%

Cleaning supplies 100% 0% 0% 0% 100%

Cleaning equipment depreciation 73% 0% 0% 27% 100%

Vehicle expenses 0% 83% 0% 17% 100%

Office expenses 0% 0% 57% 43% 100%

President's compensation 0% 0% 27% 73% 100%

ob support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Rancha 55-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 $137.40 (600 square feet @ $22.90 per hundred square feet). Calculate the customer margin earned on this job.