Elite services both residential and commercial clients. Management believes that the commercial sector has more growth opportunities and is considering dropping the residential services. Twenty employees worked a total of 20,000 hours last year, 13,000 of which was on the residential jobs. Wages were $25 an hour and any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor hours worked which is also the basis for charging customers. Because of increased competitions for commercial accounts, Elite charges $60 per hour for residential work but can only charge $45 per hour for commercial work. REQUIRED: If overhead for the year was $205,000, with 20,000 hours worked last year, what were the profits of the residential and commercial services using labor hours as the allocation base? RESIDENTIAL COMMERCIAL Revenues Less: Direct Labor Cost Overhead 205,000 205,000 Profit earned last year Overhead consists of costs of traveling to the site, using equipment (including vehicle rental) and using supplies, which can be traced as follows: ACTIVITY COST DRIVER COST COST DRIVER VOLUME TOTAL Commercial Residential Traveling Number of clients served $ 25,000 24 76 100 clients Using Equipment Equipment hours 60,000 1,775 1,225 3,000 equipment hrs Using supplies Areas service in square yard 120,000 65,000 35,000 100,000 square yards TOTAL OVERHEAD $205,000 Recalculate profits for the residential and commercial services based on these activity bases. Would it be advisable to drop the residential services in favor of the commercial services?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

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Elite services both residential and commercial clients. Management believes that the commercial sector has more growth opportunities and is considering dropping the residential services. Twenty employees worked a total of 20,000 hours last year, 13,000 of which was on the residential jobs. Wages were $25 an hour and any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor hours worked which is also the basis for charging customers. Because of increased competitions for commercial accounts, Elite charges $60 per hour for residential work but can only charge $45 per hour for commercial work.

REQUIRED:

If overhead for the year was $205,000, with 20,000 hours worked last year, what were the profits of the residential and commercial services using labor hours as the allocation base?

	RESIDENTIAL	COMMERCIAL
Revenues
Less: Direct Labor Cost
Overhead	205,000	205,000
Profit earned last year

Overhead consists of costs of traveling to the site, using equipment (including vehicle rental) and using supplies, which can be traced as follows:

ACTIVITY	COST DRIVER	COST	COST DRIVER VOLUME	TOTAL
*Commercial*	*Residential*
*Traveling*	Number of clients served	$ 25,000	24	76	100 clients
*Using Equipment*	Equipment hours	60,000	1,775	1,225	3,000 equipment hrs
*Using supplies*	Areas service in square yard	120,000	65,000	35,000	100,000 square yards
TOTAL OVERHEAD		$205,000

Recalculate profits for the residential and commercial services based on these activity bases.

Would it be advisable to drop the residential services in favor of the commercial services?

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