Donovan Steel Has Two Profit Centers: Ingots and Stainless Steel

Donovan Steel has two profit centers: Ingots and Stainless Steel. These profit centers rely on services supplied by two service departments: electricity and water. The profit centers' consumption of the service departments' outputs (in millions) is given in the following table: $$\begin{array} { | l | r | r | r | r | r | } \hline & & { \begin{array} { c } \text { Service } \\\text { Departments }\end{array} } & & { \text { Profit Centers } } \\\hline \begin{array} { l } \text { Service } \\\text { Depts }\end{array} & \text { Electricity } & \text { Water } & \text { Ingots } & \begin{array} { r } \text { Stainless } \\\text { Steel }\end{array} & \text { Total } \\\hline \text { Electricity } & 2,500 \mathrm { kwh } & \begin{array} { r } 2,500 \\\mathrm { kwh }\end{array} & \begin{array} { r } 3,000 \\\mathrm { kwh }\end{array} & 2,000 \mathrm { kwh } & \begin{array} { r } 10,000 \\\mathrm { kwh }\end{array} \\\hline \text { Water } & 1,000 \text { gal. } & \begin{array} { r } 800 \\\text { gal. }\end{array} & \begin{array} { r } 1,000 \\\text { gal. }\end{array} & 2,000 \text { gal. } & \begin{array} { r } 4,800 \\\text { gal. }\end{array} \\\hline\end{array}$$ The total operating costs of the two service departments are: $$\begin{array} { | l | r | } \hline \text { Electricity } & \$ 80 \text { million } \\\hline \text { Water } & 60 \text { million } \\\hline \text { Total cost } & \$ 140 \text { million } \\\hline\end{array}$$ Required:
a. Service department costs are allocated to profit centers using the step-down method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using the step-down allocation method.
b. Critically evaluate this allocation method.