Question

Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutors with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results. Toot! TiX Total Users 7,700 15,600 23,300 Revenues $ 1,350,000 $ 1,040,000 $ 2,390,000 Engineering hours 6,825 4,825 11,650 Engineering cost $ 333,375 $ 453,000 $ 786,375 Administrative costs $ 629,100 Required: a. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the number of users to allocate administrative costs. b. Based on the rates computed in requirement (a), what is the profit for each service

Answer 1

Answer:

1. Predetermined overhead rate of admin costs  - $ 27 per user.

2. Profit for TOOT Service   - $ 808,725

   Profit for TIX Service       -  $ 165,800

Explanation:

Computation of predetermined overhead rate

Product TOOT                                                  7,700 users

Product TIX                                                     15,600 users

Total users                                                       23,300 users                                                      

Predetermined overhead rate per user $ 629,100 / 23,300 = $ 27 per user

Allocation of Admin costs - TOOT - 7,700/ 23.300  * $ 629,100 = $ 207,900  

Allocation of Admin costs - TIX    - 15,600/ 23,300  * $ 629,100 = $ 421,200                          

2. Computation of profit per service

                                                      TOOT                 TIX

                                                          $                        $

Revenues                                      1,350,000          1.040.000

Less: Engineering costs               (  333,375 )       (     453,000 )

Less: Allocation Admin costs       (  207,900 )     (     421,200)

Profit                                               808,725              165,800