15-24 Allocation of common costs. Sunny Gunn, a self-employed consultant near Sa
ID: 2389057 • Letter: 1
Question
15-24
Allocation of common costs.
Sunny Gunn, a self-employed consultant near Sacramento, received an invitation to visit a prospective client in Baltimore. A few days later, she received an invitation to make a presentation to a prospective client in Chicago. She decided to combine her visits, traveling from Sacramento to Baltimore, Baltimore to Chicago, and Chicago to Sacramento.
Gunn received offers for her consulting services from both companies. Upon her return, she decided to accept the engagement in Chicago. She is puzzled over how to allocate her travel costs between the two clients. She has collected the following data for regular round-trip fares with no stopovers:
----
Sacramento to Baltimore ------- $1 ,200
Sacramento to Chicago -----------$ 800
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Gunn paid $1 ,600 for her three-leg flight (Sacramento–Baltimore, Baltimore–Chicago, Chicago–Sacramento). I n add ition, she paid $40 each way for limousines from her home to Sacra mento Airport and back when she returned.
1 . How should Gunn allocate the $1 ,600 airfare between the clients in Baltimore and Chicago 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 Gunn use and why?
3. How should Gunn allocate the $80 limousine charges between the clients in Baltimore and Chicago?
Explanation / Answer
Baltimore
$1,600 X$1,200/($1,200+$800)
$960
client
$1,600 X $800/($1,200+$800)
$640
Chicago client
$1,600
Baltimore as Primary Client
Regular Airfare
Allocation Amount
Baltimore client
$1,200
$1,200
Chicago client
$800
400
2000
1600
Chicago as Primary Client
Regular Airfare
Allocation Amount
Baltimore client
800
800
Chicago client
1200
800
200
1600
Baltimore as Primary Client
Regular Airfare
Allocation Amount
CHICAGO
Baltimore
Baltimore client
$1,200
$1,200
1200
Chicago client
$800
400
400
2000
1600
Chicago as Primary Client
Regular Airfare
Allocation Amount
Baltimore client
800
800
800
Chicago client
1200
800
800
200
1600
1200
2000
/2
/2
Shapely value
600
1000
Shapley allocation because it avoids considering one party as the primary party and allocating more of the common costs.
avoids disputes about who is the primary party
Baltimore
$1,600 X$1,200/($1,200+$800)
$960
client
$1,600 X $800/($1,200+$800)
$640
Chicago client
$1,600
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