10.King Khan Corporation (KKC)manufactures kongs and kangs,the production of which requires considerable energy.Power generation department costs amounted to $4 million this month,for a total of 50 million kilowatt hours (kwh)supplied to the plant.Analysis shows that 40% of power generation costs are fixed.This month the Kong Dept.made 5 million kongs,each using 4 kwh,and the Kang Dept.made 4 million kangs,each using 6 kwh. If KKC uses the simplest algorithm to allocate power costs,which is true? A)Kong will be charged $1.6 million B)Kang will be charged $2.18 million C)Kang's charge does not depend on Kong's usage D)The simplest algorithm to allocate power costs will be insulating E)All are true

Question

Quizplus · Accepted Answer

Using the simplest algorithm to allocate power costs, we allocate the fixed portion evenly between kongs and kangs, and the variable portion based on their actual usage.

Fixed portion: 40% of $4 million = $1.6 million is allocated evenly between kongs and kangs: $0.8 million each.

Variable portion: The total variable cost is $2.4 million ($4 million total cost - $1.6 million fixed cost). Kongs used 5 million * 4 kwh = 20 million kwh, and kangs used 4 million * 6 kwh = 24 million kwh, so the variable cost per kwh is $2.4 million / 44 million kwh = $0.0545/kwh.

For kongs: 20 million kwh * $0.0545/kwh = $1.09 million
For kangs: 24 million kwh * $0.0545/kwh = $1.09 million + $0.8 million fixed cost allocation = $1.89 million

Therefore, the Kang Dept. will be charged $1.89 million.