Reference no: EM133004759

Expo Rental Management (ERM) is a service used by owners of properties rented to summer vacationers. ERM proves three basic services: Website Management, Basic Rental Contract Management, and Cleaning and Inspection of rented properties.

• ERM charges its clients a flat 20% of their earned rents and then evaluates profitability for each of their 50 clients against an average share of ERM's total annual costs. Eleanor Mae, ERM's CEO believes this approach may be masking more accurate client profitability. She decided to implement a simple activity-based costing and management analysis.

• Eleanor's salary is $100,000 and she has determined she spends 10% of her time managing the Cleaning and Inspecting activity. The remainder of her time is split evenly between Website Management and Basic Rental Contract Management. Her staff works only during the summer, with 50% of its effort devoted to Cleaning and Inspection and 40% to Basic Rental Contract Management. She paid her staff a total of $60,000 last summer.

• Other operating costs include monthly Office Rent of $2,000, annual Furniture and Equipment depreciation of $18,000, and other Occupancy costs, such as phones and utilities, of $22,000 last year. Elinor estimates 10% of each of those three resource categories supports Cleaning and Inspection. Of the remainder, 1/3 supports Basic Rental Contract Management and 2/3 supports Website Management.

• Eleanor's assessment of Website Management is that its costs are simply driven by the number of customers she has. This contrasts with Basic Rental Contract Management, which is driven by the number of rental contracts. ERM assisted with 350 such contracts last summer. Cleaning and Inspection is done after each rental week. There were 500 rental weeks last summer.

Problem 1: Based on Eleanor's ABC estimates, what was the total cost of Cleaning and Inspection last year?

Option 1: $88,200
Option 2: $46,400
Option 3: $89,400