Heart & Home Properties is developing a subdivision that includes 600 home lots. The 450 lots in the Canyon section are below in ridge and do not have views of the neighboring Canyon and hills: the 150 lots in the Hilltop section after unobstructed views. The excepted selling price for each Canyon lot is $55, 000 and for each Hilltop lot is $110, 000. The developer acquired the land for $4, 000, 000 and spent another $3, 500, 000 on street and utilities improvements. Assign the joint land and improvement costs to the lots using the value basis of allocation and determine the average costs per lot.

Each Canyon lot will cost = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000

Explanation:

When you allocate joint costs using the value basis method, the costs will be allocated to the different products using their sales value:

total costs = $4,000,000 + $3,500,000 = $7,500,000

total sales value = (450 lots x $55,000) + (150 lots x $110,000) = $24,750,000 + $16,500,000 = $41,250,000

total costs allocated per $1 of sales value = $7,500,000 / $41,250,000 = $0.181818

Each Canyon lot will cost = $0.18181818 x $55,000 = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $0.18181818 x $110,000 = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000