Question

Frost Co. and Cold Ltd. currently share an employee dinning facility. Frost Co. does not have as many employees as Cold, and the CEO, Mr. Jack, believes they should not have to pay one-half of the $300,000 annual costs that are incurred for the facility. An independent consultant determined that Frost Co. could receive the same services for $100,000, and that Cold Ltd. would receive comparable services for $150,000. What should be Frost's allocated cost if the stand-alone method is used?

Question 8 options:

	$120,000
	$180,000
	$100,000
	$150,000

Answer 1

$120,000

frost Co. does not have as many employees as cold co. Hence 300000 cost should not be shared equally, they should be shared in a fair ratio which can be found out as follows.

Other independent consultant determined that Frost Co can recieve same service for 100000 and cold can receive comparable services for 150000, i.e., If both FROST and COLD company receive combined services worth of 250000 then as per consultant 100000 is attributable to FROST and 150000 to COLD

As the services are comparable, this ratio is fair in calculating cost allocated to each company

Ratio is 100000:150000 = 1:1.5

Actual expense incurred is 300000

Frost share of cost as per above ratio = 300000*1/2.5 =$120000