assignment
mararohith918
p-4.docx
P 8–3: Rose Hospital
Rose Hospital has two service departments (building services and food service) and three patient care units (intensive care, surgery, and general medicine). Building Services provides janitorial, maintenance, and engineering services, as well as space (utilities, depreciation, insurance, and taxes) to all departments and patient care units. Food Service provides meals to both patients and staff members. It operates a cafeteria and serves meals to patients in their rooms. Building services costs of $6 million are allocated based on square footage, and food service costs of $3 million are allocated based on number of meals served. The following two tables summarize the annual costs of the two service departments and the utilization of each service department by the other departments.
Required:
(Round all allocation rates and all dollar amounts to two decimal places.)
a. Allocate the two service department costs to the three patient care units using the direct method of allocating service department costs.
b. Same as part (a) except use the step-down allocation method with Building Services as the first service department allocated.
c. Write a short, nontechnical memo to management explaining why the sum of the two service department costs allocated to each patient care unit in part (b) differs from the sum of the costs computed using the step-down method starting with Food Service.
P 8–4: Mystic Herbals Mystic Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000.
Required:
a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product.
b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing?
c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mystic Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mystic Herbals makes per batch.
d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value. e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products
P 8–11: WWWeb Marketing WWWeb Marketing is a decentralized firm specializing in designing and operating Internet marketing websites. The firm is four years old and has been growing rapidly, but it only shows a small profit. WWWeb has three profit centers: Design Division, Server Operations, and the Crawler Division. The Design Division devises Internet marketing strategies for external clients, including innovative websites and Web-based marketing strategies. Server Operations maintains the clients’ websites on WWWeb’s servers. The Crawler Division operates WWWeb’s proprietary search engine that clients can use for Internet-based marketing research. In addition to these three profit centers, WWWeb has an IT group that maintains WWWeb’s servers and telecommunication lines to the Internet. The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers, and telecommunication costs. The cost of the IT group is not allocated back to the three divisions. The CEO of WWWeb argues that the IT group is a common (shared) resource and is essentially a fixed cost. Adding another client website or performing a Web search does not generate any additional IT cost to the firm because WWWeb’s IT group has excess capacity. WWWeb’s CEO argues, “Any charge for IT back to the divisions will cause the divisions to avoid using our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use that capacity.” WWWeb currently uses about 80 percent of the capacity of its servers, routers, and fiber-optic high-speed lines to the Internet. The high-speed lines are the “pipes” through which all client server Web traffic flows. These high-speed lines are also used by WWWeb’s e-mail traffic and the Crawler Divisions marketing research Web searches. Currently, the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However, the three profit center managers are projecting growth in their businesses and expect to reach capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant service degradation. Jose Coronas, head of WWWeb’s IT group, has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy, WWWeb can roughly double the capacity of its servers and highspeed access lines and lock in these low rates for two years. The incremental cost of doubling the IT group’s capacity is to raise its hardware lease costs and access line costs by 20 percent. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity, the total monthly cost would rise to $21,600. Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates.
Required: a. Analyze WWWeb’s current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity.
