The Pegasus Trucking Company has one service department and two regional operating departments. The budgeted cost behaviour pattern of the service department is $750,000 monthly in fixed costs plus $0.80 per 1,000 tonne-kilometres operated in the East and West regions. (Tonne-kilometres are the number of metric tonnes carried times the number of kilometres travelled.)

The actual monthly costs of the service department are allocated using tonnekilometres operated as the cost driver.

1. Pegasus processed 500 million tonne-kilometres of traffic in April, half for each operating region. The actual costs of the services department were exactly equal to those predicted by the budget for 500 million tonne-kilometres. Compute the costs that would be allocated to each operation region.

2. Suppose the East region was plagued by strikes, so that the freight handled was much lower than originally anticipated. East moved only 150 million tonne-kilometres of traffic. The West region handled 250 million tonne-kilometres. The actual costs were exactly as budgeted for this lower level of activity. Compute the costs that would be allocated to East and West. Note that the total costs will be lower.

3. Refer to the facts in requirement 1 above. Various inefficiencies caused the service department to incur costs of $1,275,000. Compute the costs to be allocated to East and West. Are the allocations justified? If not, what improvement do you suggest?

4. Refer to the facts in requirement 2 above. Assume that assorted investment outlays for equipment and space in the service department were made to provide a basic maximum capacity to serve the East region at a level of 360 million tonne-kilometres and the West region at a level of 240 million tonne-kilometres. Suppose fixed costs are allocated on the basis of this capacity to serve. Variable costs are assigned by using a predetermined standard rate of $0.80 per 1,000 tonne-kilometres.

Compute the costs to be allocated to each department. What are the advantages of this method over other methods?