The Darwin Co. has two main products, S and T, each of which is produced in a separate division. In order to.produce S and T, the Darwin Co. has two service departments, A and B, which supply intermediate goods and services both to the S and T divisions and to themselves. For the sake of discussion, let A be a materials handling service and B a power generator.

The budget for work to be done by the firm in a coming period is shown in Table 1.

Depreciation expenses are straight-line depreciation of generating equipment in the fifteenth year of an estimated 20-year life, that is to say it is relatively old equipment

(although well maintained).

Required

( 1 ) Using the reciprocal allocation method, determine the variable costs of service departments A and B allocated to products S and T.

(2) Choose a basis for allocating the fixed costs of the service departments, and determine the fixed cost allocation to the two products.

(3) Suppose economic conditions change so that product sales are now expected to be S = 80 and T = 90. Recalculate Table l , the production schedule, and the service department budget.

(4) What are the new sets of allocated variable and fixed service department costs?

(5) The local utility company offers to sell unlimited amounts of B to Darwin at $ 1 30 per unit. Should Darwin accept this offer?

Transcribed Image Text:

TABLE 1 SOURCE SOURCE SOURCE SOURCE A B S T User of Output A (materials handling) B (power) Division S Division T 40 Outside markets Total (in units of goods and services) 20 098998 30 35 55 30 2035 0 60 00000 0 0 0 100 120 60 100 Costs of Service Department A B 1. Variable labor, $ 7,200 $ 4,800 overhead, and materials costs 2. Supervision and other 6,000 7,000 out-of-pocket fixed costs 3. Depreciation 4,800 8,200 $18,000 $20,000+ *Plus share of Dept. B's power costs. *Plus share of Dept. A's materials handling costs.