Question

Bartolo Delivery has two divisions, air express and ground service, that share the common costs of the company’s communications network, which are $8,100,000 a year. You have the following information about the two divisions and the common communications network:

	Calls (thousands)			Time on Network (hours)
Air express		525,000			362,500
Ground service		225,000			1,087,500

Required:

Determine the cost allocation if $4.86 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. (Do not round intermediate calculations. Enter your answers in thousands of dollars.)

Answer 1

Answer:

Fixed Communication Network = $4,860,000

Variable Communication Network = $8,100,000 - $4,860,000
Variable Communication Network = $3,240,000

For Air Express

Fixed Cost = (Air Express time on Network * fixed Communication network) / (time on network of air express + time on network of ground service)
Fixed Cost = ($362,500 * 4,860,000) / ($362,500 + $1,087,500)
Fixed Cost = $1,761,750,000,000 / $1,450,000
Fixed Cost =$1,215,000

Variable cost =(calls of air express * Variable Communication network) / (Calls of air express + Calls k of ground service)
Variable cost = ($525,000 *$3,240,000) / ($525,000 + $225,000)
Variable cost =$1,701,000,000,000 / $750,000
Variable cost =$2,268,000

Total Cost = Variable Cost + Fixed Cost
Total Cost = $2,268,000 + $1,215,000
Total Cost = $3,483,000

For Ground Service

Fixed Cost = (Ground Service time on Network * fixed Communication network) / (time on network of air express + time on network of ground service)
Fixed Cost = ($1,087,500 * $4,860,000) / ($362,500 + $1,087,500)
Fixed Cost = $5,285,250,000,000 / $1,450,000
Fixed Cost =$3,645,000

Variable cost =(calls of Ground Service * Variable Communication network) / (Calls of air express + Calls of ground service)
Variable Cost = ($225,000 * $3,240,000) / ($525,000 + $225,000)
Variable Cost =$729,000,000,000 / $750,000
Variable Cost =$972,000

Total Cost = Variable Cost + Fixed Cost
Total Cost = $972,000 + $3,645,000
Total Cost = $4,617,000