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?

Short answer

Sales Price: $44.14

Step-by-step solution

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

Operating income ratio: 30% of sales

So,

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

Calculation of sales price

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