Question

Umbrella Corporation maintains computer equipment and provides consulting services in 10 states and 15 countries. The corporation has a fleet of 4 Corporate jets and 3 Helicoptors and employs 6 full time pilots who receive salary and benefits. The most appropriate way to allocate the total cost of the corporate jets, helicopters, and pilots to individual user departments who travel worldwide to provide consulting service to clients would be:

a. number of employees in each department

b. number of trips taken by each department

c. number of miles flown by each department

d. sales revenue generated by each user department.

Comments:

- Can you explain why Answer C would be the correct answer? I would appreciate it.

- This is a created example that complies with Chegg's honor code.

Answer 1

Option c will be the answer. Others are not accurate to allocate the cost of jets to the departments. Here is why...

Option c accepts the miles flown by each department. Not the numbers of flight. Number of flight maybe deceptive here because there maybe many short flights or a long distance flight. It also does not count the number of employees in each department as number of employees has no connection with the cost of jets or helicopters. A department with less number of employees may take more flight services than the others.

Again, a department with high efficiency may earn more even taking a lot lesser flights. If the cost is to allocated depending upon the revenue generated by the departments, then there maybe a case when one department has to carry the burden of another department. That will not reflect true accounts.

So the best way to allocate the cost is to measure the miles flown by each department. Cost will be divided proportionately among them according to the miles flown. If any department does not take any flight service, then it will not have to carry any cost.