Allocation of Administrative Costs Wical Rental Management Services manages four apartment buildings, each with a different owner. Wical’s CEO has observed that the apartment buildingswith more expensive rental rates tend to require more of her time and also the time of her staff. Thefour apartment buildings incur a total annual operating expense of $7,345,733, and these operatingexpenses are traced directly to the apartment buildings for the purpose of determining the profitearned by the building owners. The annual management fee that Wical earns is based on a percentageof total annual operating expenses and is negotiated each year. For the current year, the fee rate is 6%,and Wical has the following information for current-year average rental rates and occupancy rates:[LO 18-3]Apartment Complex Number of Units Average Occupancy Average RentCape Point 100 88.0% $1,895Whispering Woods 250 77.0 1,295Hanging Rock 200 72.0 995College Manor 350 82.0 895Total 900For the current year, Wical must choose between the number of units in each complex, the average occupancy, or the total annual rental revenue in each complex to allocate the management fee.Required1. How much of the management fee would be charged to Cape Point under each of the three allocationbases (number of units, average occupancy, and total annual rental revenue, respectively)?a. $35,765; $85,804; $106,278b. $48,972; $121,585; $90,050c. $1,847,655; $2,440,263; $1,954,781d. $58,489; $117,854; $86,7102. Explain which allocation base you would choose and why. What ethical issues, if any, are involved inthe choice of allocation base?
Allocation of Administrative Costs Wical Rental
with more expensive rental rates tend to require more of her time and also the time of her staff. The
four apartment buildings incur a total annual operating expense of $7,345,733, and these operating
expenses are traced directly to the apartment buildings for the purpose of determining the profit
earned by the building owners. The annual management fee that Wical earns is based on a percentage
of total annual operating expenses and is negotiated each year. For the current year, the fee rate is 6%,
and Wical has the following information for current-year average rental rates and occupancy rates:
[LO 18-3]
Apartment Complex Number of Units Average Occupancy Average Rent
Cape Point 100 88.0% $1,895
Whispering Woods 250 77.0 1,295
Hanging Rock 200 72.0 995
College Manor 350 82.0 895
Total 900
For the current year, Wical must choose between the number of units in each complex, the average occupancy, or the total annual rental revenue in each complex to allocate the management fee.
Required
1. How much of the management fee would be charged to Cape Point under each of the three allocation
bases (number of units, average occupancy, and total annual rental revenue, respectively)?
a. $35,765; $85,804; $106,278
b. $48,972; $121,585; $90,050
c. $1,847,655; $2,440,263; $1,954,781
d. $58,489; $117,854; $86,710
2. Explain which allocation base you would choose and why. What ethical issues, if any, are involved in
the choice of allocation base?
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