Question

Optimum Health Inc. provides diet, fitness, and nutrition services to clients who want a healthier lifestyle. The company customizes a program for each client based on their individual goals that includes diet recommendations (prepackaged food and supplements), nutrition counseling, and guided fitness (personal training). The company uses a modified job order cost system that keeps track of the cost of the food, vitamins, and nutritional supplements the company provides to each client, as well as the amount of time nutrition and fitness consultants spend with each client. Optimum applies all indirect operating costs (e.g., rent, utilities, and management salaries) as a percentage of the consultant's labor cost. During the most recent year, the firm estimated that it would pay $180,000 to its consultants and incur indirect operating costs of $270,000. Actual consultant labor costs were $195,000 and actual indirect operating costs were $260,000. The cost records for three of Optimum's clients are summarized below: Food and nutritional supplements Nutritional counseling ($17 per hour) Personal fitness training ($22 per hour) Indirect operating costs $ 500 170 440 ? Tom $1,000 340 660 ? Elizabeth $ 300 204 880 ? Required: 1. Compute the predetermined overhead rate. 2. Determine the total cost of serving each client. 3. Assume the company charges clients an up-front fee of $380. Food and nutritional supplements are priced at 30 percent above cost. Clients are charged $45 per hour for consulting services (both nutrition counseling and personal training). Determine the profitability of each client. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Assume the company charges clients an up-front fee of $380. Food and nutritional supplements are priced at 30 percent above cost. Clients are charged $45 per hour for consulting services (both nutrition counseling and personal training). Determine the profitability of each client. Judy $ 1,492 Tom 1,094 Elizabeth $ 322 Profitability $

Answer 1

1. Predetermined overhead rate = Estimated overheads/Estimated labor cost

= 270000/180000

= 150% of labor cost

2.Total cost is as follows

	Judy	Tom	Elizabeth
Food and nutrition supplies	500	1000	300
Counseling	170	340	204
Personal fitness training	440	660	880
Indirect operating costs = labor cost*overhead rate	915	1500	1626
Total cost	2025	3500	3010

Profitability is as follows

Judy = 380+500*1.3 +45*(10+20) -2025

=$355

Tom = 380+1000*1.3 + (20+30)*45 - 3500

=$430

Elizabeth = 380+300*1.3 + 52*45 - 3010

=$100