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Assume that you are living in Dar Es Salaam, Tanzania and your friend, Safari in Rwanda...

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Accounting

Assume that you are living in Dar Es Salaam, Tanzania and yourfriend, Safari in Rwanda invites you to visit him. Safari is sogenerous , he has promised you to pay your flight to Kigali to seehim, The round trip Dar – Kigali airfare costs $ 1,200. A weeklater, your friend Mukai, from Nairobihears from Safari that youwill be going to Kigali. She also decides to invite you to come tosee her in Nairobi and offers to reimburse you as well. The DarNairobi round trip airfare costs $ 800. You decide to combine thetwo trips into one big trip: Dar- Nairobi – Kigali- Dar that willcost $ 1,500 in airfare and save them $ 500 had it been that youhad visited them separately. Required: Using the stand alonemethod, the incremental method and the shapley value method ofallocating common costs, show how much cost of the $ 1,500 do youallocate to each of them separately.

Answer & Explanation Solved by verified expert
4.5 Ratings (615 Votes)

1. Stand-Alone Cost-Allocation Method
Party Costs Allocated
Safari: {(1200)/(1,200 + 800)}* 1,500 = 0.60*1,500=$900
Mukai: {(800)/($1,200 + $800)} * 1,500 = 0.40 *1,500 = $600
Total $1,500
2. Incremental cost-allocation method
Party Costs Allocated
Safari (primary) $1,200
Mukai (incremental) ($1,500 – $1,200) = $300
Total $1,500
3.The shapley value method of allocating common costs
a. Safari as Primary party
Party Costs Allocated
Safari (primary) $1,200
Mukai (incremental) ($1,500 – $1,200) = $300
Total $1,500
b. Mukai as Primary party
Party Costs Allocated
Mukai (primary) $800
Safari (incremental) ($1,500 – $800) = $700
Total $1,500
The shapley value method of allocating common costs = Calculating Average of (a) and (b)
Party Average of (a) and (b) = Costs Allocated
Safari: ($1200+ $700)/2 = $950
Mukai: ($300 + $800)/2 = $550
Total $1,500

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