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Jeff McMillan owns a small neighborhood shopping mall. Of the 10 store spaces in the building, seven are rented by boutique owners and three are vacant. Jeff has decided that offering more services to stores in the mall would enable him to increase occupancy. He has decided to use one of the vacant spaces to provide, at cost, a gift-wrapping service to shops in the mall. The boutiques are enthusiastic about the new service. Most of them are staffed minimally, which means that every time they have to wrap a gift, phones go unanswered and other customers in line grow impatient. Jeff figured that the gift-wrapping service would incur the following costs: the store space would normally rent for $1,800 per month, part-time gift wrappers could be hired for $1,500 per month, and wrapping paper and ribbon would average $1.20 per gift. The boutique owners estimated the following number of gifts to be wrapped per month. After the service had been in effect for six months, Jeff calculated the following actual average monthly number of gifts wrapped for each of the stores. Required: 1. Calculate a single charging rate, on a per-gift basis, to be charged to the shops. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the single charging rate? 2. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the dual charging rate? 3. Which shops would prefer the single charging rate? Why? Which would prefer the dual charging rate, and why? 4. Several of the shop owners were angry about their bill for the gift-wrapping service. They pointed out that they were to be charged only for the cost of the service. How could you make a case for them?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 7, Problem 17E
Textbook Problem
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Jeff McMillan owns a small neighborhood shopping mall. Of the 10 store spaces in the building, seven are rented by boutique owners and three are vacant. Jeff has decided that offering more services to stores in the mall would enable him to increase occupancy. He has decided to use one of the vacant spaces to provide, at cost, a gift-wrapping service to shops in the mall. The boutiques are enthusiastic about the new service. Most of them are staffed minimally, which means that every time they have to wrap a gift, phones go unanswered and other customers in line grow impatient. Jeff figured that the gift-wrapping service would incur the following costs: the store space would normally rent for $1,800 per month, part-time gift wrappers could be hired for $1,500 per month, and wrapping paper and ribbon would average $1.20 per gift. The boutique owners estimated the following number of gifts to be wrapped per month.

Chapter 7, Problem 17E, Jeff McMillan owns a small neighborhood shopping mall. Of the 10 store spaces in the building, seven , example  1

After the service had been in effect for six months, Jeff calculated the following actual average monthly number of gifts wrapped for each of the stores.

Chapter 7, Problem 17E, Jeff McMillan owns a small neighborhood shopping mall. Of the 10 store spaces in the building, seven , example  2

Required:

  1. 1. Calculate a single charging rate, on a per-gift basis, to be charged to the shops. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the single charging rate?
  2. 2. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the dual charging rate?
  3. 3. Which shops would prefer the single charging rate? Why? Which would prefer the dual charging rate, and why?
  4. 4. Several of the shop owners were angry about their bill for the gift-wrapping service. They pointed out that they were to be charged only for the cost of the service. How could you make a case for them?

1.

To determine

Compute a single charging rate, on a per-gift basis, to be charged to the shops and identify the amount charged to each shop is single charging rate is used.

Explanation of Solution

Single charging rate: Single charging rate is similar to a plant wide overhead rate wherein all support department costs are accumulated in the numerator and some measure of usage is in the denominator.

Dual charging rates:  In dual charging rates, the fixed rates are charged to the departments according to the original capacity needs. In dual-rate method, each charging rates are based on a strong causal factor and the allocation of cost to the using department is close to the amount of cost that they actually cause the support department.

Calculate the charging rate:

Chargingrate=[(Salaryofpart-timewrappers+RentofstorespaceTotalgiftswrappedpermonth)+Averagecostofwrappingpergift]=($1,500+$1,8001,000gifts)+$1

2.

To determine

Identify the amount charged to each shop using the dual charging rate.

3.

To determine

Identify the shops that prefers single charging rate and identify the shops that prefers dual charging rate.

4.

To determine

Comment on the situation given.

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Chapter 7 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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