5 Problem 7-20 Evaluating the Profitability of Services [LO7-2, LO7-3, LO7-4, LO

Question

5 Problem 7-20 Evaluating the Profitability of Services [LO7-2, LO7-3, LO7-4, 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 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 10 points articularly those located on eflook Activity Cost Pool Activity Measure Activity for the Year Square feet cleaned Miles driven Number of jobs None hundred square Cleaning carpets Travel to jobs Job support other (organization-sustaining costs and idle 20,000 feet 68,000 miles 2,080 jobs capacity costs) Not applicable The total cost of operating the company for the year is $430,000 which includes the following costs: 150,008 40,000 Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost 20,000 80,000 68,000 80,008 430,00e

Explanation / Answer

1) Cleaning carpets Travel to job Job support other Total wages 105000 30000 15000 150000 cleaning supplies 40000 40000 cleaning equip 0 dep 16000 4000 20000 vehicle exp 48000 32000 80000 office exp 27000 33000 60000 Presidents compen 32000 48000 80000 Total cost 161000 78000 59000 132000 430000 2) measure Overhead cost Activity for the year Overhead cost per unit of activity Cleaning carpets sq.ft. 161000 20000 8.05 Travel to job mile 78000 60000 1.3 Job support job 59000 2000 29.5 other NA 132000 NA NA Total 430000 3)The cost of Job on ABC costing = 500 sq.ft* 8.05 + 75 miles * 1.30 + 1 job * 29.50 = $4152 4)Revenue for 5 hundreds Sq ft = $140 - Expense - 4152 /100 = 140 -41.52 = $98.48

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