. (16 Points)

Balco Inc. has two production departments, Clear and Cream, and two service departments, Electricity and Water. Electricity renders 20% of its services to Water, 20% to Clear, and 60% to Cream, while Water renders 40% of its services to Electricity, 30% to Clear, and 30% to Cream. Total costs before allocation are $200,000 for Electricity and $300,000 for Water. You are the manager of the Cream department.

1. (3 Points) Upper management has decided to use the step down method (allocating Electricity first). How much service department cost would be allocated to your department? (SHOW COMPUTATIONS)

2. (3 Points) Provide to upper management the equations you would use if you were to utilize the reciprocal method (SET UP THE EQUATIONS BUT DO NOT SOLVE THEM).

Reciprocal Method:

3. (10 points) Refer to the Balco scenario on the previous page, and assume the following costs for Water and Electricity:

Cost Type:	Water	Electricity
Direct Labor	90,000	35,000
Variable Overhead	60,000	55,000
Supervisor Salary	70,000	60,000
Rent on Facilities	80,000	50,000
Total	300,000	200,000

Assume Electricity currently supplies a total of 800,000 kilowatt-hours. Bonds Company has approached Balco about supplying the electricity required for Balcos internal operations. The electricity supervisor cant be fired (he must be paid his original salary) and the rental agreement cannot be terminated. However, the supervisor could be transferred to a vacated supervisor position in the Clear department that otherwise will be filled by a person who would be hired and paid $25,000. Additionally, if outsourcing occurs 25% of the facility space currently used by electricity could be used to warehouse finished product; otherwise Balco will have to pay $16,360 to an outside storage company for warehousing this product. What is the maximum price per kilowatt-hour that Balco would accept for the outsourcing offer from Bonds?