Rivercity Mortgage Company provides mortgage servicing for financial institutions. As a mortgage servicer, Rivercity collects mortgage payments from homeowners on behalf of banks and other mortgage lenders. The bank, or lender, pays Rivercity half of \(1 \%\) of all funds collected as a fee for performing this service. The department that generates these revenues is called the mortgage service center.

Rivercity also coordinates escrow accounting, collecting funds from mortgagees that are used to pay real estate owners' taxes and insurance. Twice a year, Rivercity sends a report to each homeowner explaining the amount of escrow funds that have been collected and disbursed. Each time Rivercity processes an escrow analysis, it charges the lending bank a flat rate of \(\$ 2.50\). This revenue is generated by the escrow analysis department.

Rivercity maintains two departments that support mortgage servicing and escrow analysis: financial administration and computer services. The financial administration department provides accounting and auditing services for each department (mortgage servicing, escrow analysis, and computer services). Computer services provides the necessary computer hardware and programming for each department (mortgage servicing, escrow analysis, and financial administration). The computer services department also supports the financial administration department.

It is estimated that computer services dedicates approximately \(70 \%\) of its efforts to support mortgage servicing, \(20 \%\) to support escrow analysis, and \(10 \%\) to support financial administration. The financial administration department has determined that approximately \(60 \%\) of its efforts support mortgage servicing, \(25 \%\) support escrow analysis, and \(15 \%\) support computer services.

The direct costs to operate each department for the most recent year, prior to any cost allocation, were as follows:

\section*{Required}
A. Calculate the cost of mortgage servicing and escrow analysis using simultaneous algebraic equations.
B. How might managers of Rivercity Mortgage Company use the results of cost allocation to help make operating decisions?
C. Assume the mortgage servicing and escrow analysis departments had revenues of \(\$ 800,000\) and \(\$ 475,000\), respectively. Calculate costs as a percentage of revenues. What is your assessment?

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Mortgage servicing $360,000 Escrow analysis 284,000 Financial administration 235,000 Computer services 315,000