The Sommerville Trucking Company has one service department and two regional operating departments. The budgeted cost behavior pattern of the service department is $750,000 monthly in fixed costs plus $.80 per 1,000 ton-miles in the East and West regions. (Ton-miles are the number of tons carried times the number of miles traveled.) The actual monthly costs of the service department are allocated using ton-miles as the single cost-allocation base.

1. Sommerville handled 500 million ton-miles of traffic in April, half in each operating region. The actual costs of the service department were exactly equal to those predicted by the budget for 500 million ton-miles. Compute the costs that would be allocated to each operating region on an actual ton-mile’s basis.

2. Suppose the East region was plagued by strikes, so that the amount of freight handled was much lower than originally anticipated. East handled only 150 million ton-miles of traffic. The West region handled 250 million ton-miles. The actual costs were exactly as budgeted for this lower level of activity. Compute the costs that would be allocated to East and West on an actual ton-mile basis. Note that the total costs will be lower.

3. Refer to the facts in number 1. Various inefficiencies caused the service department to incur total costs of $1,250,000. Compute the costs to be allocated to East and West. Are the allocations justified? If not, what improvement do you suggest?

4. Refer to the facts in number 2. Assume that assorted investment outlays for equipment and space in the service department were made to provide a basic maximum capacity to serve the East region at a level of 360 million ton-miles and the West region at a level of 240 million ton-miles.

Suppose fixed costs are allocated on the basis of this capacity to serve. Variable costs are allocated by using a predetermined standard rate per 1,000 ton-miles. Compute the costs to be allocated to each region. What are the advantages of this method over other methods?