Question

Sharp Motor Company has two operating divisions—an Auto Division and a Truck Division. The company has a cafeteria that serves the employees of both divisions. The costs of operating the cafeteria are budgeted at $87,000 per month plus $0.90 per meal served. The company pays all the cost of the meals.

The fixed costs of the cafeteria are determined by peak-period requirements. The Auto Division is responsible for 63% of the peak-period requirements, and the Truck Division is responsible for the other 37%.

For June, the Auto Division estimated it would need 80,000 meals served, and the Truck Division estimated it would need 50,000 meals served. However, due to unexpected layoffs of employees during the month, only 50,000 meals were served to the Auto Division. Another 50,000 meals were served to the Truck Division as planned.

The cafeteria's actual fixed costs for June totaled $96,000 and its actual meal costs totaled $103,000.

Required:

1. How much cafeteria cost should be charged to each division for June?

2. Assume the company follows the practice of allocating all cafeteria costs incurred each month to the divisions in proportion to the number of meals served to each division during the month. On this basis, how much cost would be allocated to each division for June?

Answer 1

		Auto Division	Truck Division
1	Total Cost charged	$ 99,810	$ 77,190
		( $ 87,000 x 63% ) + ( 50,000 x $ 0. 90)	( $ 87,000 x 37% ) + ( 50,000 x $ 0. 90)
	Actual Fixed Costs         = $ 96,000 + $ 103,000         = $ 199,000
	These Costs are allocated on the basis of Meals Served
		Auto Division	Truck Division
2	Total Cost allocated	$ 99,500 ( $ 199,000 x 50% )	$ 99,500 ( $ 199,000 x 50% )