Question

Problem 7-20 Evaluating the profitability of services

PROBLEM 7-20 Evaluating the Profitability of Services L07-20. L07-3Q.L07-4 . L07-5 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. Page 353 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: Activity Cost Pool Activity Measure Cleaning carpets Square feet cleaned (00s) Travel to jobs Miles driven Job support Number of jobs Other (organization-sustaining costs and idle capacity costs) None Activity for the Year 20,000 hundred square feet 60,000 miles 2,000 jobs Not applicable 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 Presidents compensation Total cost $150,000 40,000 20,000 80,000 60,000 80.000 $430,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Travel to Carpets Jobs Wages 70% 20% Cleaning supplies 100% 0% Cleaning equipment depreciation 80% 0% Vehicle expenses 60% Office expenses 0% President's compensation 0% 0% Job Support Other Total 0% 10% 100% 0% 0% 100% 0% 20% 100% 0% 40% 100% 45% 55% 100% 40% 60% 100% 0% 0% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Can i get help wt questions 3-6?

Answer 1

Solotion : job is computed as follows: 6 The cost for the flying w Ranch (a) (b) ABC Cost & 40.25 Activity cost pool cleaning carpets Travel to jobs Tob support say-feet Activity Rate $8.05 per hundred Spore feet I 1.30 permite $29.50 perjob Activity 5 hundred 75 miles | ومز $97-50 $29.50 $ 167.25 Worizings; Allocation * of costs to activity cost pods: other Toral particolars cleaning carpets woges & 105000 * cleaning Supples # 40000 cleaning earupment & 16000 dep vehicle expenses $ 0 office expenses & o president's compensation fo Travel to jobs $ 30000 0 1 0 $ 48000 & o r o $ 78000 Job support fo 0 $0 to 427000 432000 59000 $ 15000 $150000 $0 $ 40000 $ 4000 $20000 $32000 & 80000 173000 60000 $48000 80000 $ 132,000 $430000 Total cort 161000 *Example: - 70t. of $150000 = $105000 other entries in the table are determined in a similar Maner, are computed as follows: & The activity rates Toral cost Activity cost poot Tord Activity (6) Activity Rate (a) (b) $ 8.05 per hondre 20000 hundred sav.feer (leaning carpets Travel to jobs Job Support $ 161000 $ 78000 59000 $ 1.30 permite 60000 miles 2000 Jobs $2900 per Job

4 computed The margin by using earned on the job can be easily costs Calwlated in part (3) above : Sales $ 140.00 Costs : - cleaning carpets & (40:25) - Travel to jobs $(97650) a ovo Job Support & (29-50) Margin → (27.25) Gallation carpet cleaning appears to be losing money on the Elying N Ranch job. However, caution is advised some of the costs may not be avidable and hence would have been incorred even if the flying N Ranch job had not been accepted a An action analysis is a more appropriate starting point for analysis than the simple report in part (4) above Neverthless, there is a point at which travel costs eat up full of the profit from a job o with the company's corrent policy of charging a flat fee for carpet cleaning irrespective of how far away the client is from the office, there clearly is some point at which jobs should be tormed down.

6 The company should consider charging a fee for travel to outlying costomers based on the distance traveled and a flat fee per job. At present, close in costomers are in essence subsidiaing service to outlying customers and large volume customers are subsidizing service to low - volume customers with fees for travel and for job support the fee per hundred square feet can be dropped. Sobstantially This may result in losing some low volume jobs in outlying areas, but the lower fee per hondred saquare feet may result in substantially more business close to Boa eman - (If the fee is low enough the added bosiness may not ever have to come at the expense of competitors. some costomers may choose to clean ther carpets more frequently if the price were more attractive).
Refer below images for the above mentioned questions, in a detailed way of solution.