A Firm Allocates the Cost of Electricity to Its Operating

question 71

Multiple Choice

A firm allocates the cost of electricity to its operating departments based upon the number of electrical outlets in each department. The actual cost for electricity is $20,000 per period plus $0.02 per kilowatt-hour (KWH) . The $20,000 is related to the amount of capacity needed, and capacity is reasonably estimated by the number of outlets. The firm has a total of 1,000 outlets and typically uses 700,000 KWH per period. Department W has 25 outlets and typically uses 15,000 KWH per period. If the firm switches from a single allocation rate based upon capacity to dual rates based upon capacity and actual use, Department W's cost will

• A) Increase by $121.43
• B) Increase by $342l.50
• C) Decrease by $50.00
• D) Decrease by $121.43

Differentiate between sunk costs and relevant costs for decision-making.

Recognize the role of opportunity costs in calculating economic profits.

Understand fixed-cost fallacy and its implications.

Evaluate decisions based on opportunity costs, ignoring sunk costs.