Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance, costs of these departments are allocated to two revenue-producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows.

Ticketing

Baggage handling $4,000,000

Aircraft maintenance $2,000,000

$6,000,000

Air miles are as follows:

Domestic

International 5,000,000

20,000,000

(a) Allocate the service department costs based on air miles.

(b) Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong?

(c) Suggest alternative methods to allocate the service department costs. Points: 25