Optimum Health Inc. provides diet, fitness, and nutrition services to clients wh

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 $230,000 to its consultants and incur indirect operating costs of $345,000. Actual consultant labor costs were $245,000 and actual indirect operating costs were $335,000. The cost records for three of Optimum’s clients are summarized below: Judy Tom Elizabeth Food and nutritional supplements $ 500 $ 1,000 $ 300 Nutritional counseling ($18 per hour) 180 360 216 Personal fitness training ($23 per hour) 460 690 920 Indirect operating costs ? ? ? 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 $430. Food and nutritional supplements are priced at 30 percent above cost. Clients are charged $47 per hour for consulting services (both nutrition counseling and personal training). Determine the profitability of each client.

Explanation / Answer

1. Predetermined overhead rate = Estimated indirect operating cost / Estimated consultant's labour cost

= 345000/245000 = 1.40 = 140.8 %

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