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The Long Term Care Plus Company has two service departments – actuarial and premium rating, and two operations departments – marketing and sales
The Long Term Care Plus Company has two service departments – actuarial and premium rating, and two operations departments – marketing and sales. The distribution of each service department's efforts to the other departments is shown below: FROM TO Rating Marketing Sales 20% 20% 60% 0% 40.0% 50.0% Actuarial 0% 10% Actuarial Rating The direct operating costs of the departments (including both variable and fixed costs) were as follows: Actuarial Premium Rating Marketing Sales $70,000 $30,000 $59,000 $83,000 The total cost accumulated in the marketing department using the reciprocal method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):
Multiple Choice O $139,685. $112,037 $120,347. O $132,106. $91,857
Expert Solution
In the given question first we need to assess total cost of Acturial & Rating department.
As Acturial department include a fix % of rating cost and Rating department also incude cost allocation from acturial department.
Working:
Let the total cost of actuarial be "A" and that of Rating be "B"
Cost of Actuarial = Direct cost + (Cost of Rating * % allocation from Rating to Acturial)
A = 70,000 + (B*.10)
A = 70000 +.10B
Cost of Rating = Direct cost + (Cost of Actuarial * % allocation from Acturial to rating)
B = 30,000 + (A* .20)
By solving both equations we have:
B = 30,000+ [( 70000 +.10B) *.20 ]
B = 30,000 +14,000 + .02B
B = 44,000/.98 = 44,897.96 or 44,898
Cost of Rating = 44,898
Cost of Actuarial = 70000 +.10B
= 70000 +.10* 44,898 = 70,000+4,489.8
= 74,490
| Particulars | Marketing |
| Direct Cost | $59,000 |
| Cost from Acturial (74,490*20%) | $14,898 |
| Cost from Rating (44,898*40%) | $17,959.2 |
| Total cost for marketing | $91,857.2 |
Correct option is $91,857 for marketing department.
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