Problem 12-16 Cost Allocation in a Service Industry
Jarmon Airlines is a small airline that occasionally carries overload
shipments for the overnight delivery company Never-Fail, Inc. Never-Fail
is a multimillion dollar company started by Peter Never immediately
after he failed to finish his first accounting course. The company's
motto is "We Never-Fail to Deliver Your Package on Time" When Never-Fail
has more freight than it can deliver, it pays Jarmon to carry the
excess. Jarmon contracts with independent pilots to fly its planes on a
per-trip basis. Jarmon recently purchased an airplane that cost the
company $24,000,000. The plane has an estimated useful life of
100,000,000 miles and a zero salvage value. During the first week in
January, Jarmon flew two trips. The first trip was a round trip flight
from Chicago to San Francisco, for which Jarmon paid $500 for the pilot
and $350 for the fuel. The second flight was a round trip from Chicago
to New York. For this trip, it paid $300 for the pilot and $150 for
fuel. The round trip between Chicago and San Francisco is approximately
4,400 miles and the round trip between Chicago and New York is 1,600
miles.
Required.
a. Identify the direct and indirect costs that Jarmon incurs for each trip.
b. Determine the total cost of each trip.
c. In addition to depreciation, identify three other indirect costs
that may need to be allocated to determine the cost of each trip.
Check:
b. To NY: $834
Click here for the solution: Jarmon Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail, Inc
