Question

Pacific Hotels operates a centralized call center for the reservation needs of its hotels. Costs associated with use of the center are charged to the hotel group (luxury, resort, standard, and budget) based on the length of time of calls made (time usage). Idle time of the reservation agents, time spent on calls in which no reservation is made, and the fixed cost of the equipment are allocated based on the number of reservations made in each group. Due to recent increased competition in the hotel industry, the company has decided that it is necessary to better allocate its costs in order to price its services competitively and profitably. During the most recent period for which data are available, the use of the call center for each hotel group was as follows:

Division                                               Time Usage                              Number of Reservation

Luxury                                                  400                                                 120

Resort                                                   200                                                 150

Standard                                               800                                                 360

Budget                                                   600                                                 870

Call center costs for personnel $840,000

Call center costs for equipment $650,000

Determine the allocation to each of the divisions using the following:

1. A single rate based on time used.

2. Dual rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

Department	Time Usage	Number of Reservation
Luxury
Resort
Standard
Budget
Total

Allocation based on time usage

Department	Proportion of Total Time	Allocated Cost
Luxury
Resort
Standard
Budget
Total of Allocation Cost

Dual Allocation

Department	Proportion of Time Usage	Allocated Time Cost	Proportion of Reservation	Allocated Equip Cost	Total Allocated
Luxury
Resort
Standard
Budget
---------------	-------------------	----------------	---------------------	-----------------

Answer 1

Department	Time usage	Number of reservation
Luxry	400	120
Resort	200	150
standard	800	360
budget	600	870
Total	2000	1500

Department	Proportion of total time	Proportion of reservation
Luxry	400 / 2000 = .2	120 / 1500 = .08
Resort	200 / 2000 = .1	150 / 1500 = .1
standard	800 / 2000 = .4	360 / 1500 = .24
budget	600 / 2000 = .3	870 / 1500 = .58
Total	1	1

Allocation based on time usage
Department	Proportion of total time	Allocated cost
Luxry	0.2	.2 X 1490000 = 298000
Resort	0.1	.1 X 1490000 = 149000
standard	0.2	.4 X 1490000 = 596000
budget	0.3	.3 X 1490000 = 447000
Total	1	1490000

Dual allocation
Department	Proportion of total time	Allocated time cost(A)	Proportion of reservation	Allocated equipment cost(B)	Total allocated(A+B)
Luxry	0.2	.2 X 840000 = 168000	0.08	.08 X 650000 = 52000	220000
Resort	0.1	.1 X 840000 = 84000	0.1	.1 X 650000 = 65000	149000
standard	0.2	.4 X 840000 = 336000	0.24	.24 X 650000 = 156000	492000
budget	0.3	.3 X 840000 = 252000	0.58	.58 X 650000 = 377000	629000
Total	1	840000	1	650000	1490000