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 areas follows:
| Ticketing |
$4,000,000 |
| Baggage handling |
$2,000,000 |
| Aircraft maintenance |
$6,000,000 |
Air miles are as follows:
| Domestic |
10,000,000 |
| International |
30,000,000 |
(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 toallocate the servicedepartment costs.