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# Cost-allocation problem: The pizza parlor manager, Joe, purchases \$100 rack to hold small bag of peanuts...

The pizza parlor manager, Joe, purchases \$100 rack to hold small bag of peanuts. The bag costs 24c, Joe will sell it for 40c. If he sells 50 bags a week, it will take him 12 1/2 weeks to cover the cost of bag. After that Joe thinks he will have clear profit of 16c a bag.

Cost-allocation experts tell Joe that this rack is costing him \$2,278 overhead because peanuts must be integrated into the entire operation and be allocated for their appropriate share of business overhead. Peanuts must share a proportion of expenditures for rent, light, equipment depreciation, salaries for cook and waitresses.

The counter where the rack is located contains 60 square feet, and counter business grosses \$60,000 a year. A square foot that the rack is occupying is worth \$1000 a year. If Joe removes the rack, he will add \$2,278 of annual overhead to the rest of his operation.

How can you help Joe solve his problem?

#### Solution Preview

The pizza parlor manager Joe purchases \$100 rack to hold small bag of peanuts The bag costs 24c, Joe will sell it for 40 c.If he sells 50 bags a week, it will take him 12 1/2 weeks to cover the cost of bag. After that Joe thinks he will have clear profit of 16 c a bag. Cost-allocation expert tell Joe, that this rack is costing him \$2,278 overhead because peanuts must be integrated into entire operation and be allocated their appropriate share of business overhead. Peanuts must share a proportion of expenditures for rent, light, equipment depreciation, salaries for cook and waitresses. The counter where the rack is located contains 60 square feet, and counter business grosses \$60,000 a year. A square foot that the rack is occupying is worth \$1000 a year. If Joe removes the rack, he will add \$2,278 of annual overhead to the rest of his operation.

How can you help Joe solve his problem?"