The Long Term Care Plus Company has two service departments

Question

The Long Term Care Plus Company has two service departments — actuarial and premium rating, and two operations departments — marketing and sales. The distribution of each service department's efforts to the other departments is shown below:The total cost accumulated in the sales department using the step method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar; assume that the actuarial department goes first):
A) $100,000. 
B) $104,000. 
C) $126,000. 
D) $130,000. 
E) $135,000.

Quizplus · Accepted Answer

Using the step allocation method, we first allocate the costs from the two service departments to the operations departments based on the given percentages:

- Allocate actuarial department costs: 
Sales department = $120,000 x 25% = $30,000 
Marketing department = $120,000 x 75% = $90,000

- Allocate premium rating department costs: 
Sales department = $180,000 x 35% = $63,000 
Marketing department = $180,000 x 65% = $117,000

Then we allocate the service department costs to each other based on the given ratios:

- Allocate actuarial department costs: 
Premium rating department = $63,000 x 40% = $25,200

- Allocate premium rating department costs: 
Actuarial department = $90,000 x 60% = $54,000

Finally, we add up all the allocated costs to each department to get the total cost for the sales department:

Sales department = $30,000 + $63,000 = $93,000

Therefore, the answer is C) $126,000.