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 Kang Dept. made 5 million kangs, each using 4 kwh, and the Kang Dept. made 4 million kangs, each using 6 kwh. In the following month, the power generation department costs amounted to $4.3 million for 51 million kwh. Kong Dept.'s usage was the same, but the Kang Dept. increased output to 4.1 million kangs, each using the standard power allowance. If KKC employs an insulating cost allocation mechanism, and fixed costs are shared equally, which is true?

Question

Quizplus · Accepted Answer

First, we need to calculate the total fixed and variable costs for power generation:

- Fixed costs: $4 million x 40% = $1.6 million
- Variable costs: $4 million - $1.6 million = $2.4 million

Next, we can calculate the cost per kwh:

- Cost per kwh: $2.4 million / 50 million kwh = $0.048/kwh

Using this cost per kwh, we can calculate the total cost for each department:

- Kong Dept.: 5 million kongs x 4 kwh x $0.048/kwh = $0.96 million
- Kang Dept.: 4 million kangs x 6 kwh x $0.048/kwh = $1.15 million

To allocate the fixed costs of $1.6 million, we can divide it equally between the two departments:

- Kong Dept.: $0.8 million fixed + $0.96 million variable = $1.76 million
- Kang Dept.: $0.8 million fixed + $1.15 million variable = $1.95 million

In the following month, the Kong Dept.'s total cost will be the same as before ($0.96 million), while the Kang Dept.'s total cost will change:

- Kang Dept.: 4.1 million kangs x 4 kwh x $0.048/kwh + $0.8 million fixed = $1.89 million

Therefore, the Kang Dept. will be charged $1.95 million - $1.89 million = $0.06 million more in the following month, which equals $2.29 million in total. Hence, answer D is correct.

King Khan Corporation (KKC) Manufactures Kongs and Kangs, the Production