Question

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

	Calls (thousands)			Time on Network (hours)
Air express		490,000			350,000
Ground service		210,000			1,050,000

Required:

a. What is the communications network cost that is charged to each division if the number of calls is used as the allocation basis?

b. What is the communications network cost to each division using time on network as the allocation basis?

Answer 1

• Working

	Calls (thousands)	Time on Network (hours)
Air express	490,000	350,000
Ground service	210,000	1,050,000
Total	700,000	1,400,000

• Requirement ‘a’

Divisions:	Communication network cost allocated	Working
Air express	$5,600,000	[$ 8,000,000 x 490000 calls/700000 calls]
Ground service	$2,400,000	[$ 8,000,000 x 210000 calls/700000 calls]
TOTAL	$8,000,000

• Requirement ‘b’

Divisions:	Communication network cost allocated	Working
Air express	$2,000,000	[$ 8,000,000 x 350000 hours/1400000hours]
Ground service	$6,000,000	[$ 8,000,000 x 1050000 hours/1400000hours]
TOTAL	$8,000,000