Chapter 12, Problem 16P

Problem 4-19A Cost allocation in a service industry

Eagle Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail, Inc. Never-Fail is a multimillion-dollar company started by Wes Never immediately after he failed to finish his first accounting course. The company’s motto is “We Never-Fail to Deliver Your Package on Time.” When Never-Fail has more freight than it can deliver, it pays Eagle to carry the excess. Eagle contracts with independent pilots to fly its planes on a per-trip basis. Eagle recently purchased an airplane that cost the company $6,000,000. The plane has an estimated useful life of 20,000,000 miles and a zero salvage value. During the first week in January, Eagle flew two trips. The first trip was a round trip flight from Chicago to San Francisco, for which Eagle paid $350 for the pilot and $500 for fuel. The second flight was a round trip from Chicago to New York. For this trip, it paid $300 for the pilot and $300 for fuel. The round trip between Chicago and San Francisco is approximately 4,400 miles and the round trip between Chicago and New York is 1,600 miles.

Required

1. a. Identify the direct and indirect costs that Eagle incurs for each trip.
2. b. Determine the total cost of each trip.
3. c. In addition to depreciation, identify three other indirect costs that may need to be allocated to determine the cost of each trip.