Gordon Grimes, a self-employed consultant near Atlanta, received an invitation to visit a prospective client in Seattle. A few days later, he received an invitation to make a presentation to a prospective client in Denver. He decided to combine his visits, traveling from Atlanta to Seattle, Seattle to Denver, and Denver to Atlanta. Grimes received offers for his consulting services from both companies. Upon his return, he decided to accept the engagement in Denver. He is puzzled over how to allocate his travel costs between the two clients. He has collected the following data for regular round-trip fares with no stopovers: Grimes paid \(\$ 900\) for his three-leg flight (Atlanta-Seattle, Seattle- Denver, Denver-Atlanta). In addition, he paid \(\$ 45\) each way \((\$ 90\) total ) for limousines from his home to Atlanta Airport and back when he returned. 1\. How should Grimes allocate the \(\$ 900\) airfare between the clients in Seattle and Denver 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 Grimes use and why? 3\. How should Grimes allocate the \(\$ 90\) limousine charges between the clients in Seattle and Denver?
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Boca Resorts (BR) operates a five-star hotel with a worldclass spa. BR has a decentralized management structure, with three divisions: Starting next month, BR will offer a two-day, two-person "getaway package" for \(\$ 1,000\). This deal includes the following: Jennifer Gibson, president of the spa division, recently asked the CE0 of BR how her division would share in the \(\$ 1,000\) revenue from the getaway package. The spa was operating at \(100 \%\) capacity. Currently, anyone booking the package was guaranteed access to a spa appointment. Gibson noted that every "getaway" booking would displace \(\$ 300\) of other spa bookings not related to the package. She emphasized that the high demand reflected the devotion of her team to keeping the spa rated one of the "Best 10 Luxury Spas in the World" by Travel Monthly. As an aside, she also noted that the lodging and food divisions had to turn away customers during only "peak-season events such as the New Year's period." 1\. Using selling prices, allocate the \(\$ 1,000\) getaway-package revenue to the three divisions using: a. The stand-alone revenue-allocation method b. The incremental revenue-allocation method (with spa first, then lodging, and then food) 2\. What are the pros and cons of the two methods in requirement \(1 ?\) 3\. Because the spa division is able to book the spa at \(100 \%\) capacity, the company CEO has decided to revise the getaway package to only include the lodging and food offerings shown previously. The new package will sell for $\$ 800$. Allocate the revenue to the lodging and food divisions using the following: a. The Shapley value method b. The weighted Shapley value method, assuming that lodging is three times as likely to sell as the food
Distinguish among the three methods of allocating the costs of support departments to operating departments.
What is one key way to reduce cost-allocation disputes that arise with government contracts?
Distinguish between two methods of allocating common costs.
Preston Department Store has a new promotional program that offers a free gift-wrapping service for its customers. Preston's customer-service department has practical capacity to wrap 5,000 gifts at a budgeted fixed cost of $\$ 4,950\( each month. The budgeted variable cost to gift-wrap an item is \)\$ 0.35$. During the most recent month, the department budgeted to wrap 4,500 gifts. Although the service is free to customers, a gift-wrapping service cost allocation is made to the department where the item was purchased. The customer-service department reported the following for the most recent month: 1\. Using the single-rate method, allocate gift-wrapping costs to different departments in these three ways: a. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services). b. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage. c. Calculate the budgeted rate based on the practical gift-wrapping capacity available and allocate costs based on actual usage. 2\. Using the dual-rate method, compute the amount allocated to each department when (a) the fixedcost rate is calculated using budgeted fixed costs and the practical gift-wrapping capacity, (b) fixed costs are allocated based on budgeted fixed costs and budgeted usage of gift-wrapping services, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage. 3\. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method.
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