Hunt Company and Indio Company Are Noncompeting Lines of Business

question 120

Essay

Hunt Company and Indio Company are noncompeting lines of business and use a common database for marketing purposes.The variable costs associated with accessing the database are readily identifiable and kept in separate cost pools that are charged to each user.The fixed costs of maintaining the database, however, cannot be identified by user on a cause-and-effect basis.These fixed costs for the next year are budgeted at $55,000.If Hunt does not use the database, the fixed costs to Indio are $48,000.An outside vendor offers to provide Hunt access to a comparable database for a fixed fee fo $60,000 per year plus variable costs of accessing the database.The same vendor offers to provide Indio access to that database for a fixed fee of $20,000 per year plus variable costs of accessing the database.Required:
Compute how much of the $55,000 fixed costs of maintaining the database are charged to by each user:
a.Under the stand-alone allocation method.
b.Under the incremental allocation method, assuming Hunt Company is regarded as the primary
user.