Question

Social Media, Inc. (SMI) has two services for users. Tootl, which connects tutors with students who are looking for tutoring services, and TIX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results. Users Revenues Engineering hours Engineering cost Administrative costs Toot! 9,000 $1,200,000 10,000 240,000 TEX 15,000 $800,000 6.909 $360,000 Total 24,000 $2,000,000 16,000 $ 600,000 $ 480,000 The company is considering using a two-stage cost allocation system and wants to assess the effects on reported product profits. The company is considering using Engineering Hours and Users as the allocation base. Additional information follows Toot! 10.000 9.000 TEX 6.000 15,000 Engineering hours Users Engineering-hour related administrative cost User related administrative cost Total 16,00 24,000 $ 120,000 $360,000 SMI thought that maybe there should be three types of administrative costs. They felt that some of the costs in the User-related pool were more related to revenue than to users. Specifically, they revised their breakdown of administrative costs as follows Engineering-hour related administrative User-related adsinistrative cost Revenue-related adinistrative cost Total adeinistrative cost $120.000 210,000 150,000 Required: 6. Compute the predetermined overhead rate used to apply the three administrative costs pools to the two services assuming SMI uses the the proposed two-stage cost system to allocate administrative costs b. Based on the rates computed in requirement ( what is the profit for each service? < Prev 3 of 5 !! Next >

Answer 1

A.

• Engineering hour-related administrative cost: $ 7.50 per engineering hour [i.e., $120,000 / 16,000 hours]
• User-related administrative cost: $ 8.75 per user [i.e., $210,000 / 24,000 users]
• Revenue-related administrative cost: 7.5 % of revenue [i.e., $150,000 / $2,000,000]

B.

Profit of each service = Revenue of each service - Engineering cost of service - All administrative costs of each service

• Profit of Toot! = $ 716,250 [i.e., $1,200,000 - $240,000 - [($7.5 x 10,000 engg. hours) + ($8.75 x 9,000 users) + (7.5% of $1,200,000)]]
  
• Profit of Tix = $ 203,750 [i.e., $800,000 - $360,000 - [($7.5 x 6,000 hours) + ($8.75 x 15,000 users) + (7.5% of $800,000)]]

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