Auckland Products is reviewing its operations to determine what additional energy-saving projects it might implement. The company’s southern plant has three service departments and two production departments. This plant has its own electric-generating facilities powered by natural gas wells that the company owns and that are located on the same property as the plant. The service departments are natural gas, electricity generation, and general administration. A summary of the use of services by other service departments as well as by the two production departments at the plant follows:

Services Provided To Electricity General Natural Gas Generation Administration | Fertilizer Additives Services From (S1) (S2) (S3) (PI) (P2)

INE UTENING EC Sn eee ee — 40% — 10% 50%

Electricity generation............... 10% — 15% 45% 30%

General administration ............ 10% 15% — 40% 35%

Departmental costs ...........0..... $70,000 $110,000 $48,000 $600,000 $440,000 The company currently allocates the costs of service departments to production departments using the step method. The local power company indicates it would charge $160,000 per year for the electricity now being generated by the company internally. Management rejected switching to the public utility on the grounds that its rates would cost more than the $110,000 cost of the present company-owned system.

Required

a. Prepare for management an analysis of the costs of the company’s own electric-generating operations.

(Use the step method.) The order of allocation is S1, $2, and $3. Should Auckland Products purchase or continue to make its own electricity?

b. Indicate how your analysis would change if the company could realize $58,000 per year from the sale of the natural gas now used for electric generating. (Assume no selling costs