PROBLEM 8-11. Analyzing Customer Protability [LO 5] Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent.On a recent job for Orvieto Industries,the company set its price as follows:

Product costs including podiums,seating,lighting,etc. $175,000

Installer salaries 25,000

Total 200,000

Markup at 35 percent 70,000

Bid price $270,000

The job turned out to be a big hassle.Orvieto requested 25 change orders,although the dollar value of the products it requested changed very little.The company also returned 33 items that had extremely minor aws (scratches that were barely visible and would be expected in normal shipping).Orvieto also requested seven meetings with designers taking 40 hours before its plan was nalized.Normally,only two or three meetings are necessary.

Nancy Jackson,controller for Lauden,decided to conduct a customer protability analysis to determine the protability of Orvieto.She grouped support costs into three categories with the following drivers:

Driver Annual Value of Driver Annual Cost

Change orders 850 change orders $212,500

Number of returns 1,000 product returns 70,000

Design meeting hours 1,300 meeting hours 78,000

Required a. Calculate the indirect service costs related to the job performed for Orvieto Industries.

b. Assuming that Orvieto Industries causes a disproportionate amount of indirect service costs, how should Lauden deal with this situation?