Question

Social Media, Inc. (SMI) has two services for users. Toot!, which connects people with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results.

	Toot!			TiX			Total
Users		9,000			15,000			24,000
Revenues	$	1,200,000		$	800,000		$	2,000,000
Engineering hours		10,000			6,000			16,000
Engineering cost	$	240,000		$	360,000		$	600,000
Administrative costs							$	480,000

Required:

a. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the engineering hours to allocate administrative costs.

b. Based on the rates computed in requirement (a), what is the profit for each service?

C. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the engineering cost to allocate administrative costs.

D. Based on the rates computed in requirement (c), what is the profit for each service?

Answer 1

(a)
Pre-determined overhead rate      = Total Administrative Costs / Total Engineering hours      =   $ 480,000 / 16,000	$ 30 per Engineering hour
(b)
Particulars	Toot	Tix
Revenues	$ 1,200,000	$ 800,000
Less: Engineering Cost	$ 240,000	$ 360,000
Less: Administrative Cost	$ 300,000 ( 10,000 x $ 30 )	$ 180,000 ( 6,000 x $ 30 )
Profit	$ 660,000	$ 260,000
(C )
Pre-determined overhead rate      = Total Administrative Costs / Total Engineering Cost      =   $ 480,000 / $ 600,000	80%
(D)
Particulars	Toot	Tix
Revenues	$ 1,200,000	$ 800,000
Less: Engineering Cost	$ 240,000	$ 360,000
Less: Administrative Cost - 80%	$ 192,000 ( $ 240,000 x 90% )	$ 288,000 ( $ 360,000 x 80% )
Profit	$ 768,000	$ 152,000