Question

b) Assume that you are living in Dar es Salaam, Tanzania, and your friend, Safari, in Rwanda invites you to visit him. Safari is so generous, he has promised you to pay for your flight to Kigali to see him. The round-trip Dar - Kigali airfare costs $1,200. A week later, your other friend Mukai, from Nairobi hears from Safari that you will be going to Kigali. She also decides to invite you to come to see her in Nairobi and offers to reimburse you as well. The Dar Nairobi round-trip airfare costs $800. You decide to combine the two trips into one big trip: Dar - Nairobi – Kigali - Dar that will cost $1,500 in airfare and save them their $500 had it been that you had visited them separately. Required: Using the stand-alone method, the incremental method, and the Shapley vaiue method of aliocating common costs, show how much cost of the $1500 do you allocate to each of them? (15 Marks) 13:52 /

Answer 1

		Stand Alone Method	Stand-alone cost-allocation method—determines the weights for cost
			allocation by considering each user of the cost object as a separate entity to determine the cost-allocation weights.
			Cost	% of cost
		Safari(Rwanda)	$1,200	60%	(1200/2000)
		Mukai(Nairobi)	$800	40%	(800/2000)
			$2,000
		Combined Cost	$1,500
		Allocated to Safari	$900	(1500*60%)
		Allocated to Mukai	$600	(1500*40%)
		Increamental Cost apporach	Incremental cost-allocation method ranks the individual users of a cost object in the order of users most
			responsible for a common cost and then uses this ranking to allocate the cost among the users.
			Cost				Cost
		Safari(Rwanda) - Primary	$1,200			Safari(Rwanda) - Increamental	$700	(1500-800)
		Mukai(Nairobi) - increamental	$300	(1500-1200)		Mukai(Nairobi) - Primary	$800
			$1,500				$1,500
		Shapley value method
		Safari(Rwanda) - Primary	(Cost allocated as primary user+cost allocated as increamental user)/2
		Mukai(Nairobi) - increamental	(Cost allocated as primary user+cost allocated as increamental user)/2
		Safari(Rwanda) - Primary	(1200+700)/2	$950
		Mukai(Nairobi) - increamental	(300+800)/2	$550
				$1,500

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