Reference no: EM1315595

Allocation of costs based on ABC and profitability of product lines.

John and Jerry, LLP, perform activities related to e-commerce consulting and information systems services in Boston.  The firm, which bills $140 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff.  The cost per hour for professional staff time is $50.  Selected information follows:

            Billable hours to clients for the year totaled 6,000 and consists of 3,600 for information system services and 2,400 for e-commerce consulting. Administrative overhead cost of $381,760 was allocated to both services based on billable hours. These costs consist of staff support of $207,000, in-house computing of $145,000, and miscellaneous office charges of $29,760.

A recent analysis of staff support costs found a correlation with the number of client services, while in-house computing was related to number of computer hours logged, and miscellaneous office charges were related to the number of client transactions.  The following data was gathered:

                                   E-Commerce               Information                 Total                                                                           Consulting                  Systems Serv  

Number of clients                      60                        240                        300

Number of computer hours       2,100                   2,900                      5,000

Number of client transactions      720                      480                      1,200

You serve as the overhead cost manager for John and Jerry.

Required:

Assign administrative overhead costs to the two product lines based on ABC, using the cost drivers designated in the data provided above.  Determine the profitability of each product line (in dollars and percentages).