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PROBLEM 7-20 Evaluating the Profitability of Services (L07-2, LO7-3, L07-4, LO7-5) 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, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below. Activity Cost Pool Activity Measure Activity for the Year Cleaning carpets Square feet cleaned (001) 20,000 hundred square foot Travel to jobs Miles driven 00.000 miles Job support Number of jobs 2,000 jobs Other costs of idle capacity and organization-sustaining costs)... None Not applicable d 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. President's compensation Total cost $150,000 40.000 20.000 80,000 00,000 80.000 $430,000 Resource consumption is distributed across the activities as follows: Other Total Distribution of Resource Consumption Across Activities Cleaning Travel to Carpets Jobs Wages. 70% 2096 Cleaning supplies 10096 0% Cleaning equipment depreciation.. 80% 0% Vehicle expenses 0% 60% Office expenses 0% 0% President's compensation 096 096 Job Support 0% 0% 0% 0% 45% 40% 10% 096 20% 4096 55% 60%6 100% 100% 100% 100% 100% 10096 ... d 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 5 hundred square foot carpet- cleaning job at the Flying Nranch-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 Nranch was $140 (5 hundred square feet @ $28 per hundred square feet). Using Exhibit 7-12 as a guide, prepare a report showing the margin from 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? Other Total Cleaning Travel Job Carpets to Jobs Support Wages.......... Cleaning supplies ..... Cleaning equipment depreciation........ Vehicle expenses... Office expenses ... President's compensation Total cost ......... The activity rates are computed as follows: (a) Activity Cost Total (b) (a) = (b) Pool Cost Total Activity Activity Rate Cleaning hundred per carpets....... square feet Travel to jobs ...... miles per Job support........ jobs per 3. The cost for the Flying N Ranch job is computed as follows: Activity Cost Pool Cleaning carpets........... Travel to jobs ...... (a) Activity Rate per (a) (b) ABC Cost (b) Activity hundred square feet miles per Job support......... per job Total................... 4. The margin earned on the job can be easily computed by using the costs calculated in part (3) above. Sales ....... Costs: Margin 5. 6

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