Question

Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutors with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results. Toot! TiX Total Users 9,000 15,000 24,000 Revenues $ 1,200,000 $ 800,000 $ 2,000,000 Engineering hours 10,000 6,000 16,000 Engineering cost $ 240,000 $ 360,000 $ 600,000 Administrative costs $ 480,000

Required:

a. Compute the predetermined overhead rate used to apply administrative costs to the two services assuming SMI uses the number of users to allocate administrative costs. b. Based on the rates computed in requirement (a), what is the profit for each service.

Answer 1

Answer:

Profit     For Toot   $ 780,000      

Profit     For TIX   $ 140,000

Explanation:

The predetermined overhead rate= Administrative costs / Total Users

                      =$ 480,000/24,000= 20

Social Media, Inc. (SMI)

                                  Toot!           TiX             Total

Users                         9,000       15,000        24,000

Revenues            $ 1,200,000  $ 800,000  $ 2,000,000

Engineering hours    10,000       6,000           16,000

Engineering cost  $ 240,000  $ 360,000  $ 600,000

Administrative costs                                        $ 480,000

Applying Rate

Administrative costs $ 180,000   $ 300,000  $ 480,000  

Profit                       $ 780,000        $ 140,000     $ 920,000

Answer 2

Answer:

a) Predetermined Overhead rate = $20

b)                                                     Toot!          TiX

   Profit                                         $780,000   $140,000

Explanation:

Predetermined Overhead rate = total cost / basis

                                                   = $480,000/24,000

                                                   = $20

the denominator 'basis' refers to what is used to allocate the cost between the two services.

b)                                               Toot!            TiX

Revenues                              $1,200,000    $800,000

Engineering Cost               - $240,000      $360,000

Admin Cost (users * $20)   -$180,000      -$300,000

Profit                                     $780,000       $140,000