Question

Problem 7-19 Evaluating the Profitability of Services (LO2, LO3, L04] Kenosha Winter Services is a small, family-owned snow-removal business. For its services, the company has always charged a flat fee per hundred square metres of snow removal. The current fee is $10.30 per hundred square metres. 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 properties that require considerable travel time. The owner's daughter, home from school for the summer, has suggested investigating this question using ABC. 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 Snow removal Travel to jobs Job support Other (costs of idle capacity and organization-sustaining costs) Activity Measure Square metres cleaned (00s) Kilometres driven Number of jobs Activity for the Year 55, 250 hundred square metres 30, 800 kilometres 250 jobs None NA The total cost of operating the company for the year is $540,000, which includes the following costs: Wages Supplies Snow removal equipment depreciation Vehicle expenses Office expenses President's compensation $ 210,000 50,000 30,000 50,000 80,000 120,000 Total cost $540,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption across Activity Cost Pools Job Support Wages Supplies Snow removal equipment depreciation Vehicle expenses Office expenses President's compensation Snow Removal 70% 100% 80% 03 0% Travel to Jobs 20% 0% 0% 70% 08 08 OOOOO Other 10% 0 % 20% 30% 60% 55% Total 100% 100% 100% 100% 100% 100% 08 45%

Answer 1

1.

	Snow removal	Travel to jobs	Job support	Other	Total
Wages	$147,000	$42,000	0	$21,000	$210,000
Supplies	50,000	0	0		50,000
Snow removal equipment dep.	24,000	0	0	6,000	30,000
Vehicle expenses	0	35,000	0	15,000	50,000
Office expenses	0	0	32,000	48,000	80,000
President's compensation	0	0	54,000	66,000	120,000
Total costs	$221,000	$77,000	$86,000	$156,000	$540,000

2.

Activity cost pool	Activity rate
Snow removal	$4 (221,000/55,250)	per hundred square meters
Travel to jobs	2.5 (77,000/30,800)	per kilometer
Job support	344 (86,000/250)	per job

3.

Activity cost pool	ABC Cost
Snow removal	$220 (5,500/100*$4)
Travel to jobs	237.5 (95*$2.5)
Job support	344
Total	$801.5

4.

Sales		$566.50
Costs:
Snow removal	$220
Travel to jobs	237.5
Job support	344	(801.5)
Product margin		$(235)