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The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units: Miami and New York. The Miami unit is the

The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units: Miami and New York. The Miami unit is the original unit of the company and is well established. The New York unit is new, much like a start-up company. The costs of the Personnel Department are allocated to each unit based on the number of employees in order to determine unit profitability. The current rate is $510 per employee. Data for the fiscal year just ended show the following:

Miami New York
Number of employees 1,210 310
Number of new hires 11 21
Number of employees departing 19 29

Orlando, the manager of the New York unit, is unhappy with the results of the controllers study. He asks the controller to develop separate rates for fixed and variable costs in the Personnel Department. The controller reports back to Orlando that the rates would be as follows:

Allocation based on Variable Rate Fixed Rate Total Rate
Employees $ 55 per employee $ 155 per employee $ 210 per employee
Transitions $ 2,010 per transition $ 3,690 per transition $ 5,700 per transition

Required:

a. Orlando argues that New York should only be allocated the variable costs from this system, because the company would have to pay the fixed costs even if New York did not exist. Compute the cost allocated to each unit using the approach Orlando prefers.

Total Allocated Cost
Miami
New York

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