Henderson Industrial Products uses a centralized service department for procurement of raw materials, servicing all three of its divisions-Construction, Manufacturing, and Military. The total monthly costs of the procurement department are $480,000. Of these costs, 80% are traceable to the divisions, and 20% are considered untraceable. Henderson has decided to assign the traceable costs to the divisions based on number of purchase orders processed. Below is a list of the purchase orders per division.
Before assigning the traceable costs to the division, Henderson needs to calculate a cost per purchase order. That amount should be:

Question

Henderson Industrial Products uses a centralized service department for procurement of raw materials, servicing all three of its divisions-Construction, Manufacturing, and Military. The total monthly costs of the procurement department are $480,000. Of these costs, 80% are traceable to the divisions, and 20% are considered untraceable. Henderson has decided to assign the traceable costs to the divisions based on number of purchase orders processed. Below is a list of the purchase orders per division.
 Before assigning the traceable costs to the division, Henderson needs to calculate a cost per purchase order. That amount should be:

Quizplus · Accepted Answer

To calculate the cost per purchase order, we need to divide the total traceable costs by the total number of purchase orders processed. The total number of purchase orders processed is:
Construction: 4,000
Manufacturing: 6,000
Military: 2,000
Total: 12,000
Therefore, the cost per purchase order is:
($480,000 x 80%) ÷ 12,000 = $32 per purchase order
Multiplying this by 1.875 (the reciprocal of the 80% traceable costs) gives us the cost per purchase order including all procurement costs:
$32 ÷ 0.8 = $40 per purchase order
Finally, adding the untraceable costs ($480,000 x 20% ÷ 12,000 = $8 per purchase order) gives us the total cost per purchase order:
$40 + $8 = $48 per purchase order
Rounding to the nearest $2 gives us the final answer of $60 per purchase order (Choice B).

Henderson Industrial Products Uses a Centralized Service Department for Procurement