PROBLEM 7-20 Evaluating the Profitability of Services LO7-2, LO7-3, 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. 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 in the pictures below: 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 7-6 as a guide, prepare the first-stage allocation of costs to the activity cost pools. 2. Using Exhibit 7-7 as a guide, compute the activity rates for the activity cost pools. 3. The company recently completed a 500 square foot carpet-cleaning job at the Flying N Ranch- a 75-mile round-trip journey from the company's offices in Bozeman. Compute the cost of this job using the activity-based costing system.
PROBLEM 7-20 Evaluating the Profitability of Services LO7-2, LO7-3, 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. 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 in the pictures below:
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 7-6 as a guide, prepare the first-stage allocation of costs to the activity cost
pools.
2. Using Exhibit 7-7 as a guide, compute the activity rates for the activity cost pools.
3. The company recently completed a 500 square foot carpet-cleaning job at the Flying N
Ranch- a 75-mile round-trip journey from the company's offices in Bozeman. Compute the
cost of this job using the activity-based costing system.
4. The revenue from the Flying N Ranch was $140 (500 square feet @ $28 per hundred square
feet).Using Exhibit 7-12 as a guide, calculate the customer margin earned on this job.
5. What do you conclude concerning the profitability of the Flying N Ranch job? Explain.
6.What advice would you give the president concerning pricing jobs in the future?
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