Question

Bartolo Delivery has two divisions, air express and ground service, that share the common costs of the company’s communications network, which are $9,000,000 a year. You have the following information about the two divisions and the common communications network:

	Calls (thousands)			Time on Network (hours)
Air express		504,000			350,000
Ground service		216,000			1,050,000

Required:

Determine the cost allocation if $6.30 million of the communications network costs are fixed and allocated on the basis of time on network, and the remaining costs, which are variable, are allocated on the basis of the number of calls.

Answer 1

Fixed costs = 6,300,000

Total time on network = 350,000 + 1,050,000 = 1,400,000

Fixed costs allocated to air express =   6,300,000 * 350,000 / 1,400,000 = 1,575,000

Fixed costs allocated ground service = 6,300,000 * 1,050,000 / 1,400,000 = 4,725,000

Variable costs = 9,000,000 - 6,300,000 = 2,700,000

Total calls = 504,000 + 216,000 = 720,000

Variable costs allocated to air express =   2,700,000 * 504,000 / 720,000 = 1,890,000

Variable costs allocated ground service = 6,300,000 * 216,000 / 1,400,000 = 810,000

	Air express	Ground service
Fixed	1,575,000	4,725,000
Variable	1,890,000	810,000
Total costs	3,465,000	5,535,000