Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutos with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results.
| Toot! | TiX | Total | ||||||||||
| Users | 11,300 | 18,600 | 29,900 | |||||||||
| Revenues | $ | 1,650,000 | $ | 1,520,000 | $ | 3,170,000 | ||||||
| Engineering hours | 8,475 | 6,475 | 14,950 | |||||||||
| Engineering cost | $ | 557,250 | $ | 676,125 | $ | 1,233,375 | ||||||
| Administrative costs | $ | 986,700 | ||||||||||
Required:
a. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the engineering cost to allocate administrative costs.
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b. Based on the rates computed in requirement (a), what is the profit for each service?
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Answer 1
| Pre-determined overhead rate | 80 % |
Calculations:
| Administrative overheads (A) | $ 986,700 |
| Total engineering cost (B) | $ 1,233,375 |
| Pre-determined overhead rate (A/B) | 80.00% |
Answer 2
| Service | Profit |
| Toot! | $ 646,950.00 |
| Tix | $ 302,975.00 |
Calculations:
| Toot! | Tix | Total | |
| Revenue | $ 1,650,000.00 | $ 1,520,000.00 | $ 3,170,000.00 |
| Administrative costs (80%) | $ 445,800.00 | $ 540,900.00 | $ 986,700.00 |
| Engineering costs | $ 557,250.00 | $ 676,125.00 | $ 1,233,375.00 |
| Profit | $ 646,950.00 | $ 302,975.00 | $ 949,925.00 |
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