Acc202 Survey of Accounting: P12-16 Kirby Airlines is a small airline that occasionally carries

Acc202 Survey of Accounting

Problem 12-16 Cost allocation in a service industry

Kirby Airlines is a small airline that occasionally carries overload shipment for the overnight delivery company Never-Fail Inc. Never Fail is a multimillion dollar company started by Jack 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 Kirby to carry the excess. Kirby contracts with independent pilots to fly its planes on a per trip basis. Kirby recently purchased an airplane that cost the company $5,500,000. The plane has an estimated useful life of 25,000,000 miles and a zero salvage value. During the first week in January, Kirby flew two trips. The first trip was a round trip flight from Chicago to San Francisco, for which Kirby paid $350 for the pilot and $300 for fuel. The second flight was a round trip from Chicago to New York. For this trip, it paid $300 for the pilot and $150 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.

Identify the direct and indirect costs that Kirby incurs for each trip.
Determine the total cost of each trip.
In addition to depreciation, identify three other costs that may need to be allocated to determine the cost of each trip.
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