Question:
Alternative Allocation Bases: Service
Packages-2-Go has two divisions, air express and ground service, that share the common costs of the company's communications network, which are $10,000,000 a year. You have the following information about the two divisions and the common communications network:
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Calls (thousands)
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Time on Network (hours)
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Air express
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240,000
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200,000
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|
Ground service
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160,000
|
800,000
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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?
c. The cost of the communications network is necessary regardless of which division uses it. Why is the method of allocation important?