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BUS 630 Week 3 DQ 2 Profitability

BUS 630 Week 3 DQ 2 Profitability

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BUS 630 Week 3 DQ 2 Profitability

Complete the following exercise and respond to at least two of your fellow students' postings. 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:

Activity Cost Pool

Activity Measure

Activity for the Year

Cleaning carpets

Square feet cleaned (00s)

20,000 hundred

   

square feet

Travel to jobs

Miles driven

60,000 miles

Job support

Number of jobs

2,000 jobs

Other (costs of idle capacity and organization-sustaining costs)

None

Not applicable


The total cost of operating the company for the year is $430,000, which includes the following costs:

Wages

 $  150,000

Cleaning supplies

       40,000

Cleaning equipment depreciation

       20,000

Vehicle expenses

       80,000

Office expenses

       60,000

President's compensation

       80,000

 

 $      430,000


Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities

 

 

Cleaning

Travel to

Job

   
 

Carpets

Jobs

Support

Other

Total

Wages

70%

20%

0%

10%

100%

Cleaning supplies

100%

0%

0%

0%

100%

Cleaning equipment depreciation

80%

0%

0%

20%

100%

Vehicle expenses

0%

60%

0%

40%

100%

Office expenses

0%

0%

45%

55%

100%

President's compensation

0%

0%

40%

60%

100%


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

  • Using Exhibit 7-5 as a guide, prepare the first-stage allocation of costs to the activity cost pools.
  • Using Exhibit 7-6 as a guide, 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). Using Exhibit 7-11 as a guide, 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?

 

 

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