Standard Aluminum Company is planning to lease CNC equipment for its production and finishing departments. Currently, the production and finishing departments lease the equipment separately and pay $410,000 and $360,000, respectively, as lease charges. If both the departments lease the equipment jointly, the contract will be reduced by $100,000. The managers of the finishing department want to know the cost that will be allocated to them under the stand-alone cost-allocation method. What will be the cost allocated to the finishing department?

Answer: $313,247

Explanation:

Independent lease cost:

Production department = $410,000

Finishing department = $360,000

Joint lease cost = $ (410,000 + 360,000) - $100,000 = $670,000

Using the standard alone cost allocation method;

Finishing department percentage is given by;

Finishing department independent cost : (finishing department independent cost + production department independent cost)

$360,000 : ($360,000 + $410,000)

$360,000 : $770,000

0.4675324467 = 46.75324467%

Therefore, finishing department share of the joint lease cost will be;

0.4675324467 * $670,000 = $313,246. 73

$313,247

The cost allocated to the finishing department is $313,246.75

Explanation:

The stand-alone cost allocation to be charged to finishing department would the initial separate costs less the reduction of $100,000 in total leasing costs as a result joint leasing apportioned based on the original lease cost of each department.

The total costs incurred initially=$410,000+$360,000

=$770,000

Reduced costs of joint leasing=$770,000-$100,000

=$670,000

This reduced cost can be shared on the basis of original leasing costs

Production $670,000*$410,000 / ($410,000+$360,000) = $356,753.25

Finishing $670,000*$360,000 / ($410,000+$360,000) = $313,246.75