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:

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

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 8—5 as a guide, prepare the first-stage allocation of costs to the activity cost pools.

2.         Using Exhibit 8—6 as a guide, compute the activity rates for the activity cost pools.

3.         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 (5 hundred square feet @ $28 per hundred square feet). Using Exhibit 8—11 as a guide, 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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Activity for Activity Cost Pool Activity Measure the Year Cleaning carpets 20,000 hundred Square feet cleaned (00s) square feet Travel to jobs Miles driven 60,000 miles Job support Number of jobs 2,000 jobs Other (costs of idle capacity and Not applicable organization-sustaining costs) None