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 $120,000 to its consultants and incur indirect operating costs of $180,000. Actual consultant labor costs were $135,000 and actual indirect operating costs were $170,000. 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 ($12 per hour)		120			240			144
Personal fitness training ($17 per hour)		340			510			680
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 $320. Food and nutritional supplements are priced at 30 percent above cost. Clients are charged $37 per hour for consulting services (both nutrition counseling and personal training). Determine the profitability of each client.

Answer 1

1. Predetermined overhead rate = Estimated indirect operating cost / Estimated consultant's labor cost = 180,000 / 120,000 = 150%

2. Total cost of serving each client:

	Judy	Tom	Elizabeth
	$	$	$
Nutritional counseling	120	240	144
Personal fitness training	340	510	680
Total consultant's labor cost	460	750	824
Indirect operating cost ( 150%)	690	1,125	1236
Food and nutritional supplements	500	1,000	300
Total cost of serving	1,650	2,875	2,360

3.

	Judy	Tom	Elizabeth
	$	$	$
Up-front fee	320	320	320
Revenues from food and nutritional supplements	650	1,300	390
Consultancy services	1,110	1,850	1,924
Total revenues	2,080	3,470	2,634
Total cost	1,650	2,875	2,360
Profit	430	595	274
Profitability ( Profit / Total revenues x 100)	20.67%	17.15%	10.40%