3. Do you think the allocation basis for common fixed costs suggested in (2) above is fair? Justify your answer. (5 points)

PLEASE SHOW WORKINGS ON HOW TO REACH FINAL ANSWER. THANK YOU

Exhibit 1 EXHIBIT 1 Ann Arbor Railroad - Projected Cost for March 20X0 COST TYPE COST ELEMENTS AMOUNT Head office-related (in Detroit station) Administrative personnel, marketing costs, IT costs $500,000 per month Roadbed, track, and signaling equipment-related $1,000,000 per month Depreciation of track & signaling equipment Interest payments Maintenance workers Repair materials $500.000 per month $5,000 per month $200 per slow-speed trip $400 per high-speed trip Station-related Building costs (temperature control, leasing costs, etc.) Detroit: $10,000 per month Chicago: $20,000 per month All other stations combined: $5,000 per month Detroit: $10,000 per month Chicago: $12,000 per month All other stations combined: $2,000 per month Other costs (including cleaning service, ticket, and baggage handling personnel) Train-related Leasing costs slow-speed train Leasing costs high-speed train Hauling costs (power and fuel) $100,000 per month per train $500,000 per month per train $5,000 per slow-speed trip $8,000 per high-speed trip $90,000 per month $60,000 per month 30 Engineers total 30 Onboard service staff total Onboard services Gourmet services contract $700.000 per month $8 per passenger Exhibit 2 EXHIBIT 2 Ann Arbor Railroad Projected Business for March 20X0 VOLUME Slow-Speed High-Speed Trips 200 300 75.000 100,000 Total Passengers (over all trips) Average Ticket Price $50 $180 Note: Passenger volumes and fares are averaged across trips