Cost Allocation: Step Method with Analysis and Decision Making: O-Hi-0 Corporation is reviewing its operations to see what additional energy-saving projects might be carried out. The company's Intermac plant has its own electric generating facilities. The electric generating plant is powered by the production of some natural gas wells that the company owns and that are located on the same property as the plant. A summary of the use of service department service by other service departments as well as by the two producing departments at the plant is summarized as follows:

Direct costs (in thousands) in the various departments and the labels used to abbreviate the departments in the calculations are as follows:

The company currently allocates costs of service departments to production departments using the step method. The local power company indicates that the power company would charge $80,000 per year for the electricity now being gener- ated by the company internally. Management rejected switching to the public utility on the grounds that its rates would cost more than the $55.000 ($15,000 + 40.000) costs of the present company-owned system.

Required:

a. What costs of electric service did management use to prepare the basis for its decision to continue generating power internally?

b. Prepare an analysis for management to indicate the costs of the company's own electric generating operations. (Use the step method.)

c. Would your answer in

(b) change if the company could realize $29,000 per year from the sale of the natural gas now used for electric generating? (Assume no selling costs.)

Services Used by Electric Generating Production Department Service Department Natural Gas Production Fixed Costs Variable Costs Equipment Maintenance No. 1 No. 2 Natural gas production .40 .10 .50 Electric generating: Fixed costs .10 Variable costs .10 = Equipment maintenance .20 .10 .05 188 .10 .30 .50 .05 .55 .30 .50 .15