Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client's office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an Activity-Based Costing (ABC) method that would include a markup of 29%. After visiting the client's proposed site, Turner has put together the following estimate for the floral mural:
What is the difference in profit for Peacock between the flat rate and the new ABC method proposed by Turner?
A) $281.33 less profit under ABC
B) $281.33 more profit under ABC
C) $8,946.47 less profit under ABC
D) $8,946.47 more profit under ABC

Question

Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client's office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an Activity-Based Costing (ABC) method that would include a markup of 29%. After visiting the client's proposed site, Turner has put together the following estimate for the floral mural:
 What is the difference in profit for Peacock between the flat rate and the new ABC method proposed by Turner?
A) $281.33 less profit under ABC 
B) $281.33 more profit under ABC 
C) $8,946.47 less profit under ABC 
D) $8,946.47 more profit under ABC

Quizplus · Accepted Answer

Determine the total cost for each activity as follows: Design, $150/hour × 3 hours = $450.00; Wall Prep, $3.65/square foot × 215 square feet = $784.75; and Painting, $275/hour × 86 hours = $23,650.00. The total cost of all activities can be found by summing the individual totals: $450.00 + $784.75 + $23,650.00 = $24,884.75. Next, add the markup: $24,884.75 × 1.29 = $32,101.33 will be the final bid price. Lastly, compare the marked-up cost of $32,101.33 against the flat bill price of $370.00 × 86 hours, or $31,820.00. Once you compare there is, $32,101.33 - $31,820.00 = $281.33 more profit under the ABC method (Choice B).