Reciprocal Cost Allocations
Arlington Acoustics manufactures a fine of quality speakers. The main production departments are Shipping, Assembly, and Fabrication. These departments are provided with services from centrally maintained facilities: computer; heating and air-conditioning, and power.
The company is organized on a profit-center basis, with the service departments treated as cost centers, Consequently, each period, the costs of computing, heating, and power must be allocated to the production departments.
The company follows the practice of allocating budgeted fixed costs on the basis of planned usage and standard variable costs on the basis of actual usage.
The distribution of actual units of service provided last week is
| COMPUTER | HEATING | POWER | SHIPPING | ASSEMBLY | FABRICATION | TOTAL UNITS |
Computer | 500 | 1,000 | 2,000 | 2,000 | 2,500 | 2,000 | 10,000 |
Heating | 3,000 | 2,000 | 4,000 | 5,000 | 3,000 | 3,000 | 20,000 |
Power | 750 | 750 | 250 | 750 | 1,000 | 1,500 | 5,000 |
These service levels corresponded to the amount of planned usage. This week’s costs were as follows:
| STANDARD BUDGETED | VARIABLE COST HXED COST |
Computer | $30,000 | $ 50,000 |
Heating | $60,000 | $100,000 |
Power | $40,000 | $ 80,000 |
Required
(1) Allocate the fixed and variable costs using the reciprocal allocation method.
(2) What is the variable cost per unit of service provided by the computer facility?
(3) Suppose one-half of the fixed power costs can be avoided if the power unit is shut down:
(a) How many units of power would have to be purchased externally?
(b) What is the maximum price the company would be willing to pay for one unit of service supplied externally?
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