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Davy Company has three products. Product 1 is manufactured entirely in Department P1. Product 2 is manufactured entirely in Department P2. Product 3 is manufactured entirely in Department P3. To produce these products, Davy has three support departments: S1 (materials handling), S2 (milling), and S3 (power). Davy is considering buying its power from an external supplier for $110.00 per kilowatt-hour (KWH). The budgeted variable costs and the allocation bases for each support department appear below. The budgeted fixed costs of S3 are $ 400,000.

Support Department S1 (materials handling) S2 (milling) 53 (power) Variable costs si 300 200 400 $120,000 S2 900 400 300 $400

Required: Prepare your answer in a single spreadsheet file. Use Excel’s formula functions to compute your answers. Show your work. Clearly label each answer. Submit the file to Canvas.

a. What are the costs allocated to P1, P2, and P3 using the reciprocal method?

b. Assuming that only the variable costs of S3 are avoidable, should Davy accept the supplier’s offer? Explain.

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Answer #1
Statement Showing Total Cost of Services Departments
S1 Material Handling S2 Milling S3 Power
Variable Cost 120000 400000 480000
Fixed Cost 400000
Total Cost 120000 400000 880000
Statement Showing allocation of Cost
DP 1 DP 2 DP 3 S1 Material Handling S2 Milling S3 Power
Cost 120000 400000 880000
-120000 -400000 -880000
Less Allocation of S1 18113.20755 27169.81132 33962.26415 6792.45283 20377.35849 13584.90566
Less Allocation of S2 82352.94118 70588.23529 117647.0588 23529.41176 47058.82353 58823.52941
Less Allocation of S3 234666.6667 217904.7619 268190.4762 67047.61905 50285.71429 41904.7619
Total 335132.8154 315662.8085 419799.7992 97369.48364 117721.8963 114313.197
-97369.48364 -117721.8963 -114313.197
Less Allocation of S1 14697.28055 22045.92082 27557.40103 5511.480206 16534.44062 11022.96041
Less Allocation of S2 24236.861 20774.45229 34624.08715 6924.81743 13849.63486 17312.04357
Less Allocation of S3 30483.51919 28306.12497 34838.30765 8709.576913 6532.182684 5443.48557
Toatal 69417.66075 71126.49808 97019.79583 21145.87455 36916.25816 33778.48956
-21145.87455 -36916.25816 -33778.48956
Less Allocation of S1 3191.830121 4787.745181 5984.681476 1196.936295 3590.808886 2393.87259
Less Allocation of S2 7600.406092 6514.633793 10857.72299 2171.544598 4343.089196 5428.861494
Less Allocation of S3 9007.597215 8364.197414 10294.39682 2573.599204 1930.199403 1608.499503
Total 19799.83343 19666.57639 27136.80128 5942.080097 9864.097484 9431.233588
-5942.080097 -9864.097484 -9431.233588
Less Allocation of S1 896.9177505 1345.376626 1681.720782 336.3441565 1009.032469 672.6883129
Less Allocation of S2 2030.8436 1740.723085 2901.205142 580.2410285 1160.482057 1450.602571
Less Allocation of S3 2514.995623 2335.353079 2874.280712 718.5701781 538.9276336 449.1063613
Total 5442.756974 5421.45279 7457.206637 1635.155363 2708.44216 2572.397245
-1635.155363 -2708.44216 -2572.397245
Less Allocation of S1 246.8159039 370.2238558 462.7798197 92.55596395 277.6678918 185.1119279
Less Allocation of S2 557.6204447 477.9603812 796.6006353 159.3201271 318.6402541 398.3003176
Less Allocation of S3 685.9725988 636.974556 783.9686843 195.9921711 146.9941283 122.4951069
Total 1490.408947 1485.158793 2043.349139 447.8682621 743.3022743 705.9073525
-447.8682621 -743.3022743 -705.9073525
Less Allocation of S1 67.60275654 101.4041348 126.7551685 25.3510337 76.05310111 50.70206741
Less Allocation of S2 153.0328212 131.1709896 218.618316 43.72366319 87.44732638 109.309158
Less Allocation of S3 188.2419607 174.7961063 215.1336693 53.78341733 40.337563 33.61463583
Total 408.8775384 407.3712307 560.5071538 122.8581142 203.8379905 193.6258612
-122.8581142 -203.8379905 -193.6258612
Less Allocation of S1 18.54462102 27.81693152 34.7711644 6.954232881 20.86269864 13.90846576
Less Allocation of S2 41.9666451 35.97141009 59.95235014 11.99047003 23.98094006 29.97617507
Less Allocation of S3 51.63356299 47.94545135 59.00978628 14.75244657 11.06433493 9.220279106
Total 112.1448291 111.733793 153.7333008 33.69714948 55.90797363 53.10491994
Balcance Allocated Equally 47.33333333 47.33333333 48.04337638 -33.69714948 -55.90797363 -53.10491994
Total Cost 431739.6864 413817.1991 554065.5026 0 0 0
Part B of Answer \\\\
Requirement of Power 5250 KW HR
Option 1
Manufactured Inhouse
Total Cost 880000
Option 2
Procured from External 577500
As from above its clear Power should not be manufactured inhouse rather it should be procure from outside but if only Variable
Cost is avoidable than addition cost of producing is 480000 which is lesser compare to purchase from outside.
Thus Company Should manufacture the product itself
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