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Wendy Chen established Windy City Coaching ) to provide teen counseling and executive coaching services to its clients. Windy Citycharges a $300 fee per hour for each service. The revenues and costs for the year are shown in the following income statement.

WINDY CITY COACHING

Income Statement

Teen Counseling Executive Coaching Total Revenue

Revenue $66,000 $135,000 $201,000

Expenses:

Admin 40,000

Transportation 36,000

Equip 20,000

Profit $105,000

Windy Cityhas kept good records of the following data for cost allocation purposes.

Activity Level

Activity Cost Driver Teen Counseling Executive Coaching

administrative support Number of clients 6 4

Traveling Number of visits 100 150

Using equipment Computer hours 900 700

Required

a.Complete the income statement using activity-based costing and Windy Citythree cost drivers.

b.Recompute the income statement using direct labor-hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).

c.How might Windy City's decisions regarding pricing or dropping a service be altered if Wendy were to allocate all overhead costs using direct labor-hours?

d.Under what circumstances would the labor-based allocation and activity-based costing (using Wendy's three cost drivers) result in similar profit results?

e.A local nonprofit charity is looking for worthy causes to support through financial grants. A primary criterion for support is financial need. Wendy is thinking of applying for support for the teen counseling program. Which allocation method would give her the best chance of winning a grant? Would it be ethical for Wendy to report the income using this method in her application?

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