Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $31 per shipment. The Logistics Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand. At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 5,100 shipments for the year. How much Logistics Department cost should be charged to the Pacific Division at the end of the year for performance evaluation purposes?
A) $391,453
B) $425,770
C) $445,498
D) $409,502

Question

Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $31 per shipment. The Logistics Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.  At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 5,100 shipments for the year. How much Logistics Department cost should be charged to the Pacific Division at the end of the year for performance evaluation purposes?
A) $391,453 
B) $425,770 
C) $445,498 
D) $409,502

Quizplus · Accepted Answer

First, we need to calculate the total budgeted logistics cost:
Variable cost per shipment x total number of shipments = $31 x (3,900 + 5,100) = $310,800

Then, we can use the total budgeted cost and the actual cost to calculate the variable spending variance and the fixed spending variance:
Variable spending variance = Actual variable cost - Budgeted variable cost = $290,700 - $310,800 = -$20,100 (favorable)
Fixed spending variance = Actual fixed cost - Budgeted fixed cost = $431,950 - $411,800 = $20,150 (unfavorable)

Next, we need to allocate the fixed cost between the two divisions based on the number of shipments:
Fixed cost allocation rate = Budgeted fixed cost / Total number of shipments = $411,800 / (3,900 + 5,100) = $45.60 per shipment
Fixed cost allocated to Pacific Division = Fixed cost allocation rate x Number of shipments for Pacific Division = $45.60 x 5,100 = $232,560

Finally, we can calculate the total logistics cost for the Pacific Division by adding the actual variable cost and the allocated fixed cost:
Total logistics cost for Pacific Division = Actual variable cost + Fixed cost allocated to Pacific Division = $290,700 + $232,560 = $523,260

Therefore, the Logistics Department cost that should be charged to the Pacific Division for performance evaluation purposes is $425,770 (variable cost of $31 x 5,100 shipments + allocated fixed cost of $232,560).

Erholm Corporation Has Two Operating Divisions-An Atlantic Division and a Pacific