Question

Kenosha Winter Services is a small family-owned snow-removal business. For its services, the company has always charged a flat fee per hundred square metres of snow removal. The current fee is $12.75 per hundred square metres. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote properties that require considerable travel time. The owner’s daughter, home from school for the summer, has suggested investigating this question using ABC. 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:
The total cost of operating the company for the year is $390,000, which includes the fol- lowing costs:
Wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Snow removal equipment depreciation. . . . . . . . . . . . . . . 20,000
Vehicle expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Office expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
President’s compensation. . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Total cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $390,000
Resource consumption is distributed across the activities as follows:
Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.
Required:
1. Using Exhibit as a guide, prepare the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit as a guide, compute the activity rates for the activity cost pools.
3. The company recently completed a 3,500-square-metre snow removal job at Hometown Hardware—a 75-kilometre round-trip journey from Kenosha’s offices. Compute the cost of this job using the ABC system.
4. The revenue from the Hometown Hardware job was $446.25 (3,500 square metres at $12.75 per hundred square metres). Using Exhibit as a guide, prepare a report showing the margin from this job.
5. What do you conclude concerning the profitability of the Hometown Hardware job? Explain.
6. What advice would you give the president concerning pricing jobs in the future?


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  • CreatedJuly 08, 2015
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