Allocation of Administrative Costs Wical Rental Management Services manages four

Question

Allocation of Administrative Costs Wical Rental Management Services manages four apartment buildings, each with a different owner. Wical’s CEO has observed that the apartment buildings with more expensive rental rates tend to require more of her time and also the time of her staff. The four apartment buildings incur a total annual operating expense of $7,345,733, and these operating expenses are traced directly to the apartment buildings for the purpose of determining the profit earned by the building owners. The annual management fee that Wical earns is based on a percentage of total annual operating expenses and is negotiated each year. For the current year the fee rate is 6%, and Wical has the following information for current year average rental rates and occupancy rates.

Required Answers - please show math
1. For the current year, Wical must choose between the number of units in each complex, the average occupancy, or the total annual rental revenue in each complex to allocate the management fee. Explain your choice of method and show how much of the management fee would be allocated to each apartment building using your method.

2. What ethical issues, if any, are involved in the choice of method in requirement 1?

Apartment Complex # of Units Average Occupancy Average Rent Cape Point 100 88% $1,895 Whispering Woods 250 77% $1,295 Hanging Rock 200 72% $995 College Manor 350 82% $895 Total 900

Explanation / Answer

Ethical issues:

1-Average Rent is the highest for the Cape Town but still they are allocated lower fees

2-College Manor has minimum Average Rent but still they are allocated with the maximum fees

3-Similarly Cape Town has the highest Average Occupancy and are allocated lower fees.

Apartment Complex No. of Units Average Occupancy Average Rent Annual Rental Revenue Cape Point 100 88% $ 1,895 $ 166,760 Whispering Woods 250 77% $ 1,295 $ 249,288 Hanging Rock 200 72% $ 995 $ 143,280 College Manor 350 82% $ 895 $ 256,865 Total 900 319% $ 816,193 Operating Expenses $      73,457,333 management Fee @ 6% $           4,407,440 Allocation of management fee on different basis No of units $             4,897.16 per unit Average Occupancy $           13,816.43 per 1 % Annual Rental Revenue 5.400000588 per 1 $ of rental revenue Preferred basis Apartment Complex # of Units Average Occupancy Annual Rental Revenue Cape Point $      489,715.55 $       1,215,845.51 $ 900,504.10 Whispering Woods $   1,224,288.88 $       1,063,864.82 $ 1,346,152.65 Hanging Rock $      979,431.11 $          994,782.69 $ 773,712.08 College Manor $   1,714,004.44 $       1,132,946.95 $ 1,387,071.15 Total $        4,407,440 $            4,407,440 $ 4,407,440

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