Answer the following question(s)using the information below:
The Sturgeon Bay Corporation currently uses a manufacturing facility costing $400,000 per year; 80% of the facility's capacity is currently being used.A start-up business has proposed a plan that would utilize the other 20% of the facility and increase the overall costs of maintaining the space by 5%.
-If the stand-alone method were used, what amount of cost would be allocated to the start-up business?
A)$20,000
B)$100,000
C)$80,000
D)$84,000
E)$67,200

Question

Quizplus · Accepted Answer

To allocate the cost to the start-up business using the stand-alone method, we need to know the total cost of the facility at 100% capacity.

Total cost of facility at 100% capacity = $400,000 / 0.8 = $500,000

So the additional cost of maintaining the other 20% of the facility is 5% of $500,000, which is $25,000.

Therefore, the cost allocated to the start-up business would be 20% of $25,000, which is $5,000.

However, this is not the entire cost of the facility. The Sturgeon Bay Corporation will still be using the other 80% of the facility, so they should also be allocated a portion of the $500,000 total cost.

The Sturgeon Bay Corporation would be allocated 80% of the total cost, which is $400,000.

Therefore, the total cost allocated to both the Sturgeon Bay Corporation and the start-up business is $400,000 + $5,000 = $405,000.

To find the cost allocated to only the start-up business, we need to subtract the cost allocated to the Sturgeon Bay Corporation:

$405,000 - $400,000 = $5,000

So the amount of cost allocated to the start-up business using the stand-alone method is $5,000 x 16 (since 16 = 100%/20%), which is $80,000.

Therefore, the best choice is D, $84,000 (since the problem asks for the amount allocated only to the start-up business, and this amount is calculated as $80,000 x 1.05 (the increase in overall costs), which equals $84,000).

Answer the Following Question(s)using the Information Below