Cranshaw Business Services $($CBS$)$ operates an information technology $($IT$)$ consulting firm out of two offices: Detroit and Los Angeles. Corporate services, such as legal, finance, and personnel, are centralized at the main office and the costs of these services are allocated to the two offices for the purposes of profitability assessment. The Detroit office is the original unit of the company and is well established, having long$-$time clients from the automotive and other manufacturing industries. The Los Angeles office is new with a smaller, much more varied, clientele. The costs of personnel services at CBS are currently allocated on the basis of the number of employees in each office. The annual costs of the personnel department total $$430,000.$ Data for the fiscal year just ended show the following:

Detroit Los Angeles

Number of employees $364136$

Number of new hires $920$

Number of employees departing $110$

Exercise $9-32($Algo$)$ Unitwide versus Department Allocation$$Decision Making $($LO $9-1,2,3)$

The manager of the Los Angeles office is now unhappy with the results of the controller$$s study. The manager asks the controller to develop separate rates for fixed and variable costs in the Personnel Department. The controller reports back to the Los Angeles manager that the costs would be as follows:

Allocation based on Variable Cost Fixed Cost Total Cost

Employees $ $96,000$ $ $136,000$ $ $232,000$

Transitions $84,000114,000198,000$

Required:

The manager claims that the Los Angeles office should only be allocated the variable costs from this system, because the company would have to pay the fixed costs even if the Los Angeles office did not exist. Compute the cost allocated to each unit using the approach the Los Angeles manager prefers.