Reference no: EM131800315

Question - Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows:

Ticketing                           $4,000,000

Baggage handling              $2,000,000

Aircraft maintenance          $6,000,000

Air miles are as follows:

Domestic                          5,000,000

International                     20,000,000

(a) Allocate the service department costs based on air miles.

(b) Evaluate World Airlines use of air miles as a basis for allocation.  Do you think the cause-and-effect relationship is strong?

(c) Suggest alternative methods to allocate the service department costs.