Question

EQuession Hep Gregory Gafford, a self-employed consultant near Atlanta, received an invitation to visit a prospective clent in Seatle A few days later he received an invitation to make a presentation to a prospective clent in Denver He decided to combine his visits, traveling from Atlanta to Seattle, Seattle to Denver, and Denver to Aanta Gafford received offers for his consulting services from both companies. Upon his retum, he decided to accept the engagement in Denver. He is puzzled over how to allocate his travel costs between the teo clents. He has collected the following data for reguar round-trip faes with no sopovers (Click lcon to view round-trip data) Read the requirements (Cick the icon to view additional data ) Requirement 1 a. How should Gafford allocate the $1,150 airfare between the clients in Seatle and Denver using the stand-alone cost alocation method? 0Hold all decimals in intemedary calulations Round your final answers to the nearest dolar) Seattle Denver Stand-alone

Answer 1

A2S = $725

A2D = $525

Round Trip(A2S2D) = $1150

1.a Standalone Cost allocation method:

Standalone % of A2S = 725/(725+525) = 58%

Standalone % of A2D = 525/(725+525) = 42%

Standalone Cost for Seattle client = 0.58*1150 = $667

similarly, Standalone cost for Denver client = 0.42*1150 = $483

1b. Incremental Cost Allocation method:

Let's assume Primary user = Seattle

and Denver = First Incremental User

A2S cost = $725

So, Seattle will pay full $725

Denver will pay 1150-725 = $425

Let's assume Primary user = Denver

and Seattle = First Incremental User

A2D cost = $525

So, Denver will pay full $525

Seattle will pay 1150-525 = $625

1c. Shapley value method:

Due to the randomness and unfairness of ICA method, We determine using Shapley value method:

Cost allocation for Seattle = Avg of ICA method sums for each user as the primary and first incremental user

SVA(Seattle) = (725 + 625) /2 = 1350/2 = $675

SVA(Denver) = (425 + 525)/2 = $475

2. We can use either Shapley method or Standalone method as the difference between them is quite low and also, as the priorty for the events is same for Gregory, both should get same amount of benefit. In light of this, Shapley allocation works best.

3. If limousine is hired on both sides, it can easily be allocated equally to both clients as this expense would have occured in same fashion if standalone trips were made but twice. Also, As limo rounds are standalone events. They can easily be divided equally between both. So, $70 for both clients.