The Manes Company has two products. Product 1 is manufactured entirely in Division X. Product 2 is manufactured entirely in Division Y. To produce these two products, the Manes Company has two support divisions: A (a materials-handling division) and B (a power-generating division). An analysis of the work done by divisions A and B in a typical period follows:

The work done in Division A is measured by the direct labour-hours of materials-handling time. The work done in Division B is measured by the kilowatt-hours of power. The budgeted costs of the support divisions for the coming year are:

The budgeted costs of the operating divisions for the coming year are $1,500,000 for Division X and $800,000 for Division Y.
Supervision costs are salary costs. Amortization in Division B is the straight-line amortization of power-generation equipment in its nineteenth year of an estimated 25-year useful life; the equipment is old but well maintained.
REQUIRED
1. What are the allocations of costs of support divisions A and B to operating divisions X and Y using (a) the direct method, (b) the step-down method (allocate Division A first), (c) the step-down method (allocate Division B first), and (d) the reciprocal method?
2. An outside company has offered to supply all the power needed by the Manes Company and to provide all the services of the present power division. The cost of this service will be $40 per kilowatt-hour of power. Should Manes accept? Explain.

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Used By Supplied By A B 250150 100 400 100 500 Division A (Materials Handling) Division B (Power Generation) Variable indirect labour and $ 70,000 10,000 20,000 $100,000 +Power costs indirect materials costs $10,000 10,000 20,000 $40,000 + Materials-handling costs Supervision Amortization