(TCO 6) Pacific Airlines has three service departments; ticketing, baggage handl
ID: 2354477 • Letter: #
Question
(TCO 6) Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows: Ticketing $4,000,000 Baggage handling $2,000,000 Aircraft maintenance $6,000,000 Air miles are as follows: Domestic 5,000,000 International 20,000,000 (a) Allocate the service department costs based on air miles. (b) Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong? (c) Suggest alternative methods to allocate the service department costs.Explanation / Answer
Allocate the service department costs based on air miles.
Domestic allocation = 10000000x 0.30 = $3,000,000
International allocation = 30 million miles x 0.30 = $9,000,000
================================
Do you think the causeand-effect relationship is strong?
For airplane maintenance, there is a significant relationship with air mileage. The longer a plane flies, the more likely it needs more extensive maintenance; so air mileage is an appropriate cost driver. Baggage and ticketing have little to no relationship with mileage.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.