Q1TIAT_3 - Horngren'S Financial And Managerial Accounting

Question

PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.

Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:

___________________________________________________________________

Activity                         Estimated              Allocation Base      Estimated Quantity

                                           Cost                                                        of Allocation 

                                                                                                                      Base____

Admission                     \) 60,000           Number of admissions           20,000

Cleaning                         240,000    Cleaning direct labor hours        100,000

Grooming                         80,000   Grooming direct labor hours           4,000

Total indirect costs    $ 380,000________________________________________

 

Requirements

3. If PetSmart desires a 30% target operating income after covering all its costs, what would PetSmart have to charge the customer to achieve that operating income?

Step-by-Step Solution

Answer

Sales Price: $44.14

Step-by-Step-Solution Step 1: Computation of Cost to sales ratio

Operating income ratio: 30% of sales 

So,

$\begin{array}{c}\mathbf{Operating}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{ratio}\mathbf{=}\mathbf{100}\mathbf{-}\mathbf{Operating}\mathbf{ }\mathbf{Income}\mathbf{ }\mathbf{ratio}\\ \mathbf{=}\mathbf{100}\mathbf{-}\mathbf{30}\\ \mathbf{=}\mathbf{70}\mathbf{\%}\end{array}$

Step 2: Calculation of sales price

$\begin{array}{c}\mathbf{Sales}\mathbf{ }\mathbf{Price}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{cost}}{\mathbf{Cost}\mathbf{ }\mathbf{sales}\mathbf{ }\mathbf{ratio}}\\ \mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{30}\mathbf{.}\mathbf{9}}{\mathbf{0}\mathbf{.}\mathbf{70}}\\ \mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{44}\mathbf{.}\mathbf{14}\end{array}$