Reference no: EM131786056
Problem - Profitability
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, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:
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Activity Cost Pool
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Activity Measure
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Activity for the Year
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Cleaning carpets
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Square feet cleaned (00s)
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20,000 hundred
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|
|
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square feet
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Travel to jobs
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Miles driven
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60,000 miles
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Job support
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Number of jobs
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2,000 jobs
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Other (costs of idle capacity and organization-sustaining costs)
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None
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Not applicable
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The total cost of operating the company for the year is $430,000, which includes the following costs:
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Wages
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$ 150,000
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Cleaning supplies
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40,000
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Cleaning equipment depreciation
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20,000
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Vehicle expenses
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80,000
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Office expenses
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60,000
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President's compensation
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80,000
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|
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$ 430,000
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Resource consumption is distributed across the activities as follows:
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Distribution of Resource Consumption Across Activities
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|
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Cleaning
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Travel to
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Job
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|
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Carpets
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Jobs
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Support
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Other
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Total
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Wages
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70%
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20%
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0%
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10%
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100%
|
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Cleaning supplies
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100%
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0%
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0%
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0%
|
100%
|
|
Cleaning equipment depreciation
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80%
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0%
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0%
|
20%
|
100%
|
|
Vehicle expenses
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0%
|
60%
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0%
|
40%
|
100%
|
|
Office expenses
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0%
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0%
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45%
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55%
|
100%
|
|
President's compensation
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0%
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0%
|
40%
|
60%
|
100%
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Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.
Prepare the first-stage allocation of costs to the activity cost pools.
Compute the activity rates for the activity cost pools.
The company recently completed a 5 hundred 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.
The revenue from the Flying N ranch was $140 (5 hundred square feet @ $28 per hundred square feet). prepare a report showing the margin from this job.
What do you conclude concerning the profitability of the Flying N ranch job? Explain.
What advice would you give the president concerning pricing jobs in the future?
Reference: Noreen, E. W., Brewer, P. B., Garrison R. H. (2011). Managerial accounting for managers (2nd ed.). New York, NY: McGraw Hill.
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