Evaluating the Profitability of Services - Carpet Cleaners
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Evaluating the Profitability of Services. See attached file for full problem description.
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 seems to be adequate. The activity cost pools and their activity measures are attached.
1. Prepare the first-stage allocation of costs to the activity cost pools.
2. Compute the activity rates and the activity cost pools.
2. 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.
4. The revenue from the Flying N ranch was $140. Prepare a report showing the margin from 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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Solution Summary
The solution analyzes the true profitability of a carpet cleaning service based on activity based costing methods.
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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