Auburn Banking and Loan Company has a graphic design department that designs loan forms and other documents used by the company's two subsidiaries, Auburn Personal Banking and Auburn Business Banking. For practical purposes, the costs of the graphic design department are primarily fixed and relate to the salaries of the departments two employees.
Required:
Analyze the following four independent cases:
a. Assume there is no allocation of graphic design costs to the subsidiaries. Jobs requested by the subsidiaries are completed promptly (generally by the next business day). How does the allocation (which is zero) compare to the opportunity cost of using design services?
b. Assume there is no allocation of graphic design costs to the subsidiaries. Jobs requested by the subsidiaries generally take weeks to complete; the subsidiaries often go outside the company for design services. How does the allocation (which is zero) compare to the opportunity cost of using design services?
c. Assume subsidiaries receive an allocation of $60 per design hour. Jobs requested by the subsidiaries generally take weeks to complete; the subsidiaries often go outside the company for design services rather than wait for jobs to be completed. They generally pay $80 per hour outside the company. How does the allocation ($60 per design hour) compare to the opportunity cost of using design services?
d. Assume subsidiaries receive an allocation of $60 per design hour. Although the graphic design department is busy, jobs requested by the subsidiaries are completed promptly (generally by the next business day). How does the allocation ($60 per design hour) compare to the opportunity cost of using design services?