Elite Lawn & Plowing (EL&P) is a lawn and snow plowing service with both residential and commercial clients. The owner believes that the commercial sector has more growth opportunities and is considering dropping the residential service.

Twenty employees worked a total of 41,000 hours last year, 30,000 on residential jobs and 11,000 on commercial jobs. Wages were $16 per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Because of increased competition for commercial accounts,EL&P can charge $60 per hour for residential work, but only $45 per hour for commercial work.

If overhead for the year was $205,000, what were the profits of the residential and commercial services using labor-hours as the allocation base?

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facundobuzzetti facundobuzzetti · Answer 1 · 2021-03-16T01:37:47+01:00

Answer:

Results are below.

Explanation:

First, we need to calculate the predetermined overhead rate:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 205,000 / 41,000

Predetermined manufacturing overhead rate= $5 per direct labor hour

Now, we can calculate the profit of each service:

Residential:

Revenue= 30,000*60= 1,800,000

Direct labor costs= 30,000*16= (480,000)

Overhead= 5*30,000= (150,000)

Gross profit= $1,170,000

Commercial:

Revenue= 11,000*45= 495,000

Direct labor costs= 11,000*16= (176,000)

Overhead= 5*11,000= (55,000)

Gross profit= $264,000