Question

Single Charging Rates House Corporation Board (HCB) of Tri-Gamma Sorority is responsible for the operation of a two-story sorority house on the State University campus. HCB has set a normal capacity of 60 women. At any given point in time, there are 100 members of the chapter: 60 living in the house and 40 living elsewhere (e.g., in the freshman dorms on campus). HCB needs to set rates for the use of the house for the coming year. The following costs are budgeted: $240,000 fixed and $34,800 variable. The fixed costs are fairly insensitive to the number of women living in the house. Food is budgeted at $40,000 and is included in the fixed costs; food does not seem to vary greatly given the stated capacity. The variable expenses consist of telephone bills and some of the utilities. HCB is not responsible for chapter dues, party fees, pledging and initiation fees, and other social expenditures. Women living in the house eat 20 meals per week there and live in a two-person room. (All in-house members’ rooms, bathroom facilities, etc., are on the second floor.) All members eat Monday dinner at the house and have full use of house facilities (e.g., the two TV lounges, kitchens, access to milk and cereal at any time, study facilities, and so on). HCB has traditionally set two rates: one for in-house members and one for out-of-house members. There are 32 weeks in a school year.

Single Charging Rates

House Corporation Board (HCB) of Tri-Gamma Sorority is responsible for the operation of a two-story sorority house on the State University campus. HCB has set a normal capacity of 60 women. At any given point in time, there are 100 members of the chapter: 60 living in the house and 40 living elsewhere (e.g., in the freshman dorms on campus). HCB needs to set rates for the use of the house for the coming year. The following costs are budgeted: $240,000 fixed and $34,800 variable. The fixed costs are fairly insensitive to the number of women living in the house. Food is budgeted at $40,000 and is included in the fixed costs; food does not seem to vary greatly given the stated capacity. The variable expenses consist of telephone bills and some of the utilities. HCB is not responsible for chapter dues, party fees, pledging and initiation fees, and other social expenditures. Women living in the house eat 20 meals per week there and live in a two-person room. (All in-house members’ rooms, bathroom facilities, etc., are on the second floor.) All members eat Monday dinner at the house and have full use of house facilities (e.g., the two TV lounges, kitchens, access to milk and cereal at any time, study facilities, and so on).

HCB has traditionally set two rates: one for in-house members and one for out-of-house members. There are 32 weeks in a school year.

Required:

Set charging rates for the in-house and out-of-house members. For interim computations, carry amounts out to the nearest cent. Round your final answers to the nearest dollar.

Answer 1

1.     Clearly, some expenses pertain to women living in the house, while others pertain to all members. In-house members use the second floor, most of the food, and most of the variable expenses. All members use the first floor facilities, food for Monday night dinners, and cereal and milk for snacks. HCB must determine a fair method of allocating the costs since the sorority is a nonprofit entity and house bills in total must equal house costs. It is difficult to allocate the costs precisely to the two types of members given the sketchy nature of the data.

2.     Using a benefits-received approach, the following charging rates might be applied.

In-house members:

              Use of second floor ($240,000 – $40,000)/2.......................                    $  100,000

              Use of first floor [($240,000 – $40,000)/2]0.6.....................                          60,000

              Food* ($1.01)(60)(20)(32)...................................................                          38,784

              Variable expenses.................................................................                          34,800

                     Total..............................................................................                    $  233,584

Charging rate per in-house member per year: $233,584/60 = $3,893

*Cost per meal: $40,000/{[40 + (60 × 20)] × 32} = $1.01

Out-of-house members:

              Use of first floor [($240,000 – $40,000)/2]0.4.....................                      $  40,000

              Food ($1.01) (32)(40)...........................................................                            1,293

                     Total..............................................................................                      $  41,293

Charging rate per out-of-house member per year: $41,293/40 = $1,032