15-23 Allocation of common costs. Ben and Gary are students at Berkeley College.
ID: 2389056 • Letter: 1
Question
15-23
Allocation of common costs. Ben and Gary are students at Berkeley College. They share an apartment that is owned by Gary. Gary is considering subscribing to an Internet provider that has the following packages available:
Package------------------------------ Per Month
A. Internet access ----------------------$60
B. Phone services ------------------------15
C. Internet access + phone services ---65
Ben spends most of his time on the Internet (“everything can be found online now”). Gary prefers to spend his time talking on the phone rather than using the Internet (“going online is a waste of time”). They agree that the purchase of the $65 total package is a “win–win” situation.
1 . Allocate the $65 between Ben and Gary using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method.
2. Which method would you recommend they use and why?
Explanation / Answer
(
Basic Costs
Allocation
Ben (Internet
$60
$52
Gary (Phone)
15
13
$75
$65
INCREMENTAL COST ALLOCATION METHOD
PRIMARY USER
Basic Costs
Allocation
Ben (Internet
$60
$60
Gary (Phone)
15
5
$75
$65
PRIMARY USER
Basic Costs
Allocation
Ben (Internet
15
15
Gary (Phone)
60
50
$75
$65
(
Basic Costs
Allocation
Ben (Internet
$60
$52
Gary (Phone)
15
13
$75
$65
INCREMENTAL COST ALLOCATION METHOD
PRIMARY USER
Basic Costs
Allocation
Ben (Internet
$60
$60
Gary (Phone)
15
5
$75
$65
PRIMARY USER
Basic Costs
Allocation
Ben (Internet
15
15
Gary (Phone)
60
50
$75
$65
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