Donovan Steel
Donovan Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers’ consumption of the service departments’ outputs (in millions) is given in the following table:
| Service Departments | Profit Centers |
| ||
Service Departments | Electricity | Water | Ingots | Stainless Steel | Total |
Electricity | 2.500 kwh | 2.500 kwh | 3.000 kwh | 2.000 kwh | 10.000 kwh |
Water | 1.000 gal. | 800 gal. | 1.000 gal. | 2.000 gal. | 4.800 gal. |
The total operating costs of the two service departments are
Electricity | $ 80 million |
Water | 60 million |
Total cost | $140 million |
Required:
a. Service department costs are allocated to profit centers using the step-down method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using the step-down allocation method.
b. Critically evaluate this allocation method.
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