Pacific Airlines has three service departments; ticketing, baggage handling, and

Question

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 10,000,000 International 30,000,000 (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

I'm assuming that 1/5 of each department $ goes to domestic and 4/5 goes to international. Two other ways of putting it: So you have a pie of 5 parts only one part is domestic and the 4 others are international. Without zeros: there are 25 miles total; 5 or 1/5 are domestic and 20 or 4/5 are international.

so 4000000*1/5=800000 $ in domestic tickets

4000000-800000= 3200000 $ in international tickets

continue multiplying the other departments by 1/5 for domestic and subtracting that answer from the department total for the international.

For B: Not sure exactly what your teacher means. But I would say that the relationship of miles to department is pretty strong for allocating monies in proportion.

For C: you could allocate according to passenger numbers for domestic vs international I suppose.

what kind of class is this for? Math, statistics, economics? That could help in figuring out what kind of answer is appropriate. Good luck with the info above.

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