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(thousands of minutes) Number of Reservations (thousands) Luxury 220 104 Resort 110 143 Standard 440 273 Budget 330 780 During this period, the cost of the call center amounted to $870,000 for personnel and $660,000 for equipment and other costs.

Required: a. Determine the allocation to each of the divisions using the following:

1. A single rate based on time used. (Do not round intermediate calculations.)

2. Dual rates based on time used (for personnel costs) and number of reservations (for equipment and other cost). (Do not round intermediate calculations.)

Answer 1

Requirement 1. A single rate based on time used
Single Time Rate = Total Cost/Total Time Usage
Total Cost = $870000+$660000 =$1530000
Total Time Usage = 220+110+440+330= 1100
Single Time Rate = $1530000/1100 = $1390.9090
	Time Usage		SINGLE TIME RATE		EXPENSES ALLOCATED
Luxury	220	X	1390.909	=	$                          306,000
Resort	110	X	1390.909	=	$                          153,000
Standard	440	X	1390.909	=	$                          612,000
Budget	330	X	1390.909	=	$                          459,000
TOTAL EXPENSES					$                      1,530,000

Requirement 2. Dual Rate Based
Time rate for personal cost
Time rate = Total Personal Cost/Total Time usage
Total Personal Cost = $870000/1100 = $790.9090
Personal cost Allocated
	Time Usage		SINGLE TIME RATE		EXPENSES ALLOCATED
Luxury	220	X	790.909	=	$                          174,000
Resort	110	X	790.909	=	$                            87,000
Standard	440	X	790.909	=	$                          348,000
Budget	330	X	790.909	=	$                          261,000
TOTAL PERSONAL COST					$                          870,000
Reservation rate for equipment and other cost
Rate based on reservation = Total equipment and other cost/Total No. of Reservation
Equipment and other cost=$660000
Total Reservation = 104+143+273+780 = 1300
Rate = $660000/1300 = $507.6923
Equipment and other cost allocated
	No. of Reservation		SINGLE TIME RATE		EXPENSES ALLOCATED
Luxury	104	X	507.6923	=	$                            52,800
Resort	143	X	507.6923	=	$                            72,600
Standard	273	X	507.6923	=	$                          138,600
Budget	780	X	507.6923	=	$                          396,000
TOTAL EQUIPMENT AND OTHER COST					$                          660,000

	Personal Cost Allocated on time rate based	Equipment and other Cost allocated on reservation rated based	Total Cost Allocated
Luxury	$          174,000	$                52,800	$            226,800
Resort	$             87,000	$                72,600	$            159,600
Standard	$          348,000	$              138,600	$            486,600
Budget	$          261,000	$              396,000	$            657,000
	$          870,000	$              660,000	$        1,530,000

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