Question

Social Media, Inc. (SMI) has two services for users. Toot!, which connects TA 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		7,100		15,100		22,200
Revenues	$	1,300,000	$	960,000	$	2,260,000
Engineering hours		6,550		4,550		11,100
Engineering cost	$	300,875	$	420,625	$	721,500
Administrative costs					$	577,200

Required:

a. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the engineering hours to allocate administrative costs.

b. Based on the rates computed in requirement (a), what is the profit for each service?

Service	Profit
Toot!
TiX

Answer 1

a.

Administrative costs = $577,200

Engineering hours = 11,100

Predetermined overhead rate = Administrative costs / Engineering hours

= 577,200/11,100

= $52 per engineering hour

b.

Administrative cost applied to Toot! = Engineering hours used in Toot! x Predetermined overhead rate

= 6,550 x 52

= $340,600

Administrative cost applied to TiX = Engineering hours used in TiX x Predetermined overhead rate

= 4,550 x 52

= $236,600

b.

Income Statement
	Toot!	TiX
Revenues	1,300,000	960,000
Engineering cost	-300,875	-420,625
Administrative cost	-340,600	-236,600
Profit	$658,525	$302,775

Service	Profit
TooT!	$658,525
TiX	$302,775

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