Letter Corporation Has Two Service Departments (A and B) That

question 27

Multiple Choice

Letter Corporation has two service departments (A and B) that provide service to each other and to two operating departments (X and Y) . A provides 20% of its service to B, 30% of its service to X, and 50% of its service to Y. B provides 10% of its service to A, 45% of its service to X, and 45% of its service to Y. Operating costs in A are $300,000. Operating costs in B are $180,000. Cost allocations are made starting with department A. No distinction is made between variable and fixed costs.
-If service department costs are allocated using the step-down method, what is the total amount of service cost that will be allocated to Y?

• A) $231,000
• B) $240,000
• C) $258,000
• D) $270,000

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Definitions:

Sunk Costs

Expenses that have already been incurred and cannot be recovered, often considered in decision-making processes.

Price War

A competitive strategy in which retailers reduce prices to gain business, often leading to lower profit margins for the competitors.

Mixed Strategy

In game theory, a strategy in which a player randomizes over possible actions, assigning a probability to each.

Nash Equilibrium

A concept in game theory where no player can benefit by changing their strategy while the other players keep theirs unchanged, representing a state of mutual best responses.