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# Service Deparment Costs, Cash Collection, Internal Rate of Return, Overhead Etc.

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1) World 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.

2. Joanie Corp sells it products on both credit and cash basis. Monthly sales are sold 10% for cash, 90% for credit. Credit sales are collected 40% in the month of sale and 60% the following month. Sales for the first quarter are as follows.
January \$100,000
February \$150,000
March \$125,000
Compute cash collections for February.

3. ,8 English Company produces 5,000 units of part number 1011 as a component used in electronic equipment. Normal selling price is \$50. Cost to make the product are as follows:
Direct Labor \$14
Direct Material \$12
Variable Factory Overhead \$6
Fixed Factory Overhead \$4
English Company has been approached by a company to sell the company 2,000 units of part 1011 for \$35.
Should English accept this special order and what impact will it have on total profits? Back up your answer with appropriate calculations.

4. Singleton Company is trying to determine a predetermined manufacturing overhead. Estimated overhead for the upcoming year is \$600,000. Budgeted numbers for machine hours are 120,000, budgeted labor hours are 15,000 hours at a rate of \$20.00 per hour. Compute the predetermined overhead rate based on:
A. machine hours
B direct labor hours
C direct labor dollars

5. An investment of \$185,575 is expected to generate returns of \$65,000 per year for each
of the next four years. What is the investment's internal rate of return?

6. Copper Queen Hotel is interested in estimating fixed and variable costs so the hotel can make more accurate projections of costs, break-even and profits. The hotel is in a resort area and busy from November through March. In July and August the hotel has only a 50 percent occupancy.
Classify each of the following costs as fixed, variable or mixed.
A. Depreciation of the building
B. Salaries of restaurant staff
C. Salaries of hotel manager, desk manager, accounting clerks.
D. Soap, shampoo and other toiletries in the bathrooms.
E. Laundry costs.(cost of bed linens, table cloths, cleaning products, depreciation on cleaning equipment.
F. Food and beverage costs
G. Grounds Maintenance.

7. The following data has been taken from Air-tite company, its first year of business.
Units produced 100,000
Units sold 60,000
Units in ending inventory 40,000
Fixed manufacturing overhead \$500,000
A, Compute the amount of fixed manufacturing overhead that would be expensed in the current year if full absorption costing is used.
B. Compute the amount of fixed manufacturing overhead that would be expensed in the current year if variable costing is used.
C. Compute the amount of fixed manufacturing overhead that would be included in ending inventory under full absorption costing.

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#### Solution Preview

1) World 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.

Total air miles = 25,000,000
Total service department cost = 12,000,000
Cost allocated to domestic = 12,000,000X5,000,000/25,000,000 = 2,400,000
Cost allocated to international = 12,000,000X20,000,000/25,000,000= 9,600,000

B. Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong?

The use of air miles is not correct for all costs. Only aircraft maintenance would be dependant on air miles. Baggage handling and ticketing would not have a strong cause and effect relationship.

C. Suggest alternative methods to allocate the service department costs.

As an alternative
Ticketing costs should be allocated based on number of tickets sold
Baggage handling costs should be allocated based on number of baggage.

2. Joanie Corp sells it products on both credit and cash basis. Monthly sales are sold 10% for cash, 90% for credit. Credit sales are collected 40% in the month of sale and 60% ...

#### Solution Summary

The solution explains 7 questions relating to managerial accounting with clear, displayed calculations for each.

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