Question

The Long Term Care Plus Company has two service departments — actuarial and premium rating, and two operations departments — marketing and sales. The distribution of each service department's efforts to the other departments is shown below:

	Actuarial	Rating	Marketing	Sales
Actuarial	0%	10%	10%	80%
Rating	10%	0%	30.08	60.0%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Actuarial	$100,000
Premium Rating	$50,000
Marketing	$55,000
Sales	$73,000

The total cost accumulated in the sales department using the reciprocal method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333\%, and round all dollar amounts to the nearest whole dollar):

A) $194,213

B) $83,788

C) $124,037

D) $103,968

E) $131,616

Answer 1

The correct answer is A) $194213

Calculations

Firstly we have to calculate total cost of service departments.

Let total cost of actuarial cost = x

Total cost of premium rating = y

Now

X = 100000 + 10%of y

Y = 50000 + 10% of x

Now putting value of x in y equation so,

Y = 50000 + .1 (100000+ .1y)

Y = 50000+ 10000+ .01Y

.99Y =60000

Y =60000÷.99

Y = 60606

So total cost of premium rating is $60606

Now total cost of actuarial

X =100000 + .1(60606)

X = 106061

So total cost of sales department

=73000 + (60%× 60606) + (80% × 106061)

= $ 194213

Therefore the correct answer is a) $194213