Question

Problem 7-20 Evaluating the Profitability of Services [LO7-2, LO7-3, LO7-4, LO7-5]

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 $23.75 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 below:

Activity Cost Pool	Activity Measure	Activity for the Year
Cleaning carpets	Square feet cleaned (00s)	9,500	hundred square feet
Travel to jobs	Miles driven	291,000	miles
Job support	Number of jobs	1,900	jobs
Other (organization-sustaining costs and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $368,000 which includes the following costs:

Wages	$	149,000
Cleaning supplies		21,000
Cleaning equipment depreciation		16,000
Vehicle expenses		31,000
Office expenses		70,000
President’s compensation		81,000
Total cost	$	368,000

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities
	Cleaning Carpets		Travel to Jobs		Job Support		Other		Total
Wages	80	%	12	%	0	%	8	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	68	%	0	%	0	%	32	%	100	%
Vehicle expenses	0	%	76	%	0	%	24	%	100	%
Office expenses	0	%	0	%	56	%	44	%	100	%
President’s compensation	0	%	0	%	27	%	73	%	100	%

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 55-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 $142.50 (600 square feet @ $23.75 per hundred square feet). Calculate the customer margin earned on this job.

Answer 1