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Evaluating the Profitability of Services [LO2, LO3, LO4, LO5]
Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.95 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 more 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 activ- ity cost pools and their activity measures appear below:
|
Activity Cost Pool |
Activity Measure |
Activity for the Year |
|
Cleaning carpets . . . . . . . . . . . . . . |
Square feet cleaned (00s) |
10,000 hundred square feet |
|
Travel to jobs . . . . . . . . . . . . . . . . . |
Miles driven |
50,000 miles |
|
Job support . . . . . . . . . . . . . . . . . . |
Number of jobs |
1,800 jobs |
|
Other (organization-sustaining and |
|
|
|
idle capacity costs) . . . . . . . . . . |
None |
Not applicable |
The total cost of operating the company for the year is $340,000, which includes the follow- ing costs:
Resource consumption is distributed across the activities as follows:
|
|
Cleaning Carpets |
Travel to Jobs |
Job Support |
Other |
Total |
|
Wages . . . . . . . . . . . . . . . . . . . . . . . . . |
75% |
15% |
0% |
10% |
100% |
|
Cleaning supplies . . . . . . . . . . . . . . . . . |
100% |
0% |
0% |
0% |
100% |
|
Cleaning equipment depreciation . . . . . |
70% |
0% |
0% |
30% |
100% |
|
Vehicle expenses . . . . . . . . . . . . . . . . . |
0% |
80% |
0% |
20% |
100% |
|
Office expenses . . . . . . . . . . . . . . . . . . |
0% |
0% |
60% |
40% |
100% |
|
President’s compensation . . . . . . . . . . . |
0% |
0% |
30% |
70% |
100% |
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 7–5 as a guide, prepare the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 7–6 as a guide, compute the activity rates for the activity cost pools.
3. The company recently completed a 6 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch—a 52-mile round-trip from the company’s offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system.
4. The revenue from the Lazy Bee Ranch was $137.70 (6 hundred square-feet at $22.95 per hundred square feet). Using Exhibit 7–11 as a guide, prepare a report showing the margin from this job.
5. What do you conclude concerning the profitability of the Lazy Bee Ranch job? Explain.
6. What advice would you give the president concerning pricing jobs in the future?
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