Liberty Credit Checks Produces Two Styles of Credit Reports: Personal

question 21

Essay

Liberty Credit Checks produces two styles of credit reports: personal and corporate. The difference between the two is the amount of background information and data collection required. The corporate report uses more skilled personnel because additional checking and data are required. Total support service costs to be allocated are $3,200,000. The relevant figures for the year just completed follow:
$$\begin{array} { l r c } \text { Allocation base } & \text { Individual } & \text { Corporate } \\\text { Data purchased } & \$ 40,000 & \$ 80,000 \\\text { Research hours } & 24,000 & 30,000 \\\text { Interview hours } & 1,000 & 10,000 \\\text { Number of reports } & 16,000 & 3,000\end{array}$$
Required:
(a) Which allocation base would be preferred by each manager? Which allocation base would be least preferred?
(b) Provide arguments that each manager would make for his/her preferred allocation base. How would each manager argue against his/her least preferred allocation base?

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Definitions:

Average Rate of Return

A financial ratio used to evaluate the profitability of an investment, calculated by dividing the average annual profit by the initial investment cost, typically expressed as a percentage.

Straight-Line Depreciation

A strategy for apportioning the cost of a concrete asset into equal yearly sums throughout its serviceable life.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from total revenue.

Present Value Factor

A factor used in the calculation of the present value of cash flows, based on a specific rate and number of periods.