Problem I.
The building maintenance department for Packard Manufacturing Corp. budgets annual costs of $3,000,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. Packard Manufacturing Corp. is considering 2 allocation bases for assignment of costs to departments:
A) square footage and B) direct labor hours. The following data relate to the potential allocation bases:
Production Dept. 1 Production Dept. 2
Square footage 20,000 30,000
Direct labor hours 30,000 20,000
1) Calculate the costs allocated to the production departments using each allocation base. Comment on which allocation base is preferrable and why. Explain the calculation.
Problem II.
The editor of SportsWorld Magazine is considering three alternative prices for the new monthly sports magazine. The estimate of price and quantity demanded are:
Price Quantity Demanded
Alternative 1 $6.95 20,000
Alternative 2 $5.95 25,000
Alternative 3 $4.95 32,000
Monthly costs of producing and delivering the magazine include $80,000 of fixed costs and variable costs of $1.50 per issue.
1) Which price should the editor of SportsWorld Magazine select to potentially generate the most profit? Explain the calculation.
2) Should factors be considered in the decision-making process other than just profit? Discuss briefly.