Question

Hardy Inc. has two operating departments (1 and 2) and is considering renting a new machine to help automate the printing process. The normal rental for the machine is $25/hour, but for rentals that exceed 1,000 hours the rental rate drops to $22/hour. Operating Dept 1 needs the machine for 300 hours. Operating Dept 2 needs the machine for 900 hours. If Hardy uses the incremental method and Operating Department 2 is the primary user, how much of the cost will be allocated to Department 1

Answer 1

Answer:

$6,900

Explanation:

When you use the incremental cost allocation method, you must rank cost activities and how they will be allocated. In this case, department 2 is the primary user, and therefore, rental costs must be allocated first to them. Rental costs will be allocated at a $25/hour rate.

Since department 1 is the next user, 100 hours will be allocated using the same rate as department 2, but the next 200 hours will be allocated at the lower $22/hour rate. Total rental cost allocation to department 1 = (100 x $25) + (200 x $22) = $2,500 + $4,400 = $6,900