Question

Konig Enterprises, Ltd., owns and operates three restaurants in Vancouver, B.C. The company allocates its fixed administrative expenses to the three restaurants on the basis of sales dollars. Last year the fixed administrative expenses totaled $950,000 and were allocated as follows:

	Restaurants
		Rick’s Harborside				Imperial Garden				Ginger Wok				Total
Total sales—Last Year	$	19,800,000			$	11,700,000			$	13,500,000			$	45,000,000
Percentage of total sales		44	%			26	%			30	%			100	%
Allocation (based on the above percentages)	$	418,000			$	247,000			$	285,000			$	950,000

This year the Imperial Garden restaurant increased its sales by $1 million. The sales levels in the other two restaurants remained unchanged. The company’s sales data for this year were as follows:

	Restaurants
		Rick’s Harborside				Imperial Garden				Ginger Wok				Total
Total sales—This Year	$	19,800,000			$	12,700,000			$	13,500,000			$	46,000,000
Percentage of total sales		43	%			28	%			29	%			100	%

Fixed administrative expenses for this year remained unchanged at $950,000.

Required:

1. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the three restaurants for this year.

2. Calculate the change in each restaurant’s allocated cost from last year to this year.

3. Is sales dollars a good base for allocation of fixed costs?

Answer 1