Delta Railroad Has Two Operating Divisions--Freight and Passenger

question 14

Multiple Choice

Delta Railroad has two operating divisions--Freight and Passenger. The Maintenance Department serves both divisions. Variable Maintenance Department costs are budgeted at $12 per thousand miles. The fixed Maintenance Department costs are budgeted at $800,000 per year. The level of the fixed Maintenance Department costs are determined by the peak-period requirements. Data for last year follow:

During last year, the Maintenance Department actually incurred $650,000 in variable costs and $815,000 in fixed costs.
-For performance evaluation purposes, how much of the fixed Maintenance Department cost should be charged to the Freight Division at the end of the year?

• A)$480,000
• B)$440,000
• C)$472,000
• D)$50,000

---

Definitions:

Contribution Margin

The amount by which a product's sales exceed its variable costs, contributing towards covering fixed costs and generating profit.

IRR

Internal Rate of Return; a metric used in financial analysis to estimate the profitability of potential investments.

Base-Case

A scenario used as a benchmark in analysis, representing the default or most likely set of assumptions.

Sensitivity Analysis

A technique used to determine how different values of an independent variable will affect a particular dependent variable under a given set of assumptions.