Allocation of common costs. Barbara Richardson, a self-employed consultant near Sacramento, received an invitation to visit a prospective client in Baltimore. A few days later, she received an invitation to make a presentation to a prospective client in Chicago. She decided to combine her visits, traveling from Sacramento to Baltimore, Baltimore to Chicago, and Chicago to Sacramento. Richardson received offers for her consulting services from both companies. Upon her return, she decided to accept the engagement in Chicago. She is puzzled over how to allocate her travel costs between the two clients. She has collected the following data for regular round-trip fares with no stopovers:
Sacramento to Baltimore $900
Sacramento to Chicago $600
Richardson paid $1,200 for her three-leg flight (Sacramento–Baltimore, Baltimore–Chicago, Chicago– Sacramento). In addition, she paid $30 each way for limousines from her home to Sacramento Airport and back when she returned.
1. How should Richardson allocate the $1,600 airfare between the clients in Baltimore and Chicago using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method?
2. Which method would you recommend Richardson use and why?
3. How should Richardson allocate the $60 limousine charges between the clients in Baltimore and Chicago?
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