P 9-27: Mutual Fund Company Mutual Fund Company (MFC) is considering centralizing its overnight mail function. Five depart- ments within MFC use overnight mail service: trades processing, trades verifications, securities pro- cessing, accounts control, and customer service. Although these departments send different types of packages (weight and content), they often send packages to the same destinations. Currently, each of these departments independently contracts for overnight mail service. The five departments' present rates are: Present Rates per Package Number of Pounds in Package Department 2 3 4 S Trades processing $7.25 $8.50 $9.75 $11.00 $12.25 Trades verifications 7.75 8.75 9.75 10.75 11.75 Securities processing 8.00 9.50 11.00 12.50 14.00 Accounts control 10.00 12.00 14.00 15.50 16.50 Customer service 16.00 18.00 20.00 22.00 24.00 MFC has requested that each of the five departments submit an estimate of its overnight mail for the coming year. The departments' estimates are as follows: Usage Estimates Packages Annual Number of Average per Day Packages Weight per Package Pounds per Year Trades processing 100 25,000 5 lbs. Trades verifications 100 25,000 3 lbs. 125,000 75,000 Securities processing 100 25,000 2 lbs. 50,000 Accounts control 50 12,500 5 lbs. 62,500 Customer service 10 2,500 1 lb. 2,500 Total 360 90,000 315,000 *Based on 250 days per year. Absorption Cost System 443 Using these volume estimates, MFC was able to negotiate the following corporate rates with EXP Overight Express Corporate Rates per Package Weight (Pounds) Rate Weight (Pounds) Rate 1 $7.75 6 $12.55 2 8.70 13.55 3 9.65 8 14.50 10.65 9 15.45 11.60 10 16.45 The centralized ovemight mail unit would be run as a cost center. All expenses would be charged back to the five departments. The chargebacks would have two components: 1. The corporate rate per package charged by EXP (based on weight). 2. An overhead allocation per package. MFC plans to use a prospective overhead rate. Pounds per package will be used as the alloca- tion base. As each package comes in, overhead will be charged. The rate will be set at the beginning of the year, allowing the overnight mail service to be costed as it is used. The common costs that make up overhead are labor, supervision, and other expenses as follows: Overhead Expenses 3 employees @ $11,000 per person, per year $33,000 1 supervisor @ $18,000 per year 18,000 24,000 $75,000 Other costs (rent, utilities, etc.) Total overhead At this time, there is much controversy and skepticism about the centralization of the overnight mail function. The managers of trades processing and trades verifications are most opposed to the proposed system. They claim not only that it is unfair but also that the annual cost savings created by this centralized system do not justify a change. Required: a. Calculate the overhead allocation rate that would be used with the centralized system. b. Calculate the estimated overall cost and department cost of MFC's overnight mail service under both the present system and the proposed centralized system. e. Discuss why the managers of trades processing and trades verifications are opposed to the proposed centralized system. Do you agree with their criticisms? d. Evaluate the proposed method of allocating overhead under the centralized system. Is there