Question

Assume that you are living in Dar Es Salaam, Tanzania and your friend, Safari in Rwanda invites you to visit him. Safari is so generous , he has promised you to pay your flight to Kigali to see him, The round trip Dar – Kigali airfare costs $ 1,200. A week later, your friend Mukai, from Nairobihears from Safari that you will be going to Kigali. She also decides to invite you to come to see her in Nairobi and offers to reimburse you as well. The Dar Nairobi round trip airfare costs $ 800. You decide to combine the two trips into one big trip: Dar- Nairobi – Kigali- Dar that will cost $ 1,500 in airfare and save them $ 500 had it been that you had visited them separately. Required: Using the stand alone method, the incremental method and the shapley value method of allocating common costs, show how much cost of the $ 1,500 do you allocate to each of them separately.

Answer 1

1. Stand-Alone Cost-Allocation Method
Party	Costs Allocated
Safari:	{(1200)/(1,200 + 800)}* 1,500 = 0.60*1,500=$900
Mukai:	{(800)/($1,200 + $800)} * 1,500 = 0.40 *1,500 = $600
Total	$1,500
2. Incremental cost-allocation method
Party	Costs Allocated
Safari (primary)	$1,200
Mukai (incremental)	($1,500 – $1,200) = $300
Total	$1,500
3.The shapley value method of allocating common costs
a. Safari as Primary party
Party	Costs Allocated
Safari (primary)	$1,200
Mukai (incremental)	($1,500 – $1,200) = $300
Total	$1,500
b. Mukai as Primary party
Party	Costs Allocated
Mukai (primary)	$800
Safari (incremental)	($1,500 – $800) = $700
Total	$1,500
The shapley value method of allocating common costs = Calculating Average of (a) and (b)
Party	Average of (a) and (b) = Costs Allocated
Safari:	($1200+ $700)/2 = $950
Mukai:	($300 + $800)/2 = $550
Total	$1,500