Nolan and Steve are students at Berkeley College. They share Nolan spends most of his time on the Internet ("everything

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Nolan And Steve Are Students At Berkeley College They Share Nolan Spends Most Of His Time On The Internet Everything 1 (93.4 KiB) Viewed 37 times

Nolan And Steve Are Students At Berkeley College They Share Nolan Spends Most Of His Time On The Internet Everything 2 (78.56 KiB) Viewed 37 times

Nolan and Steve are students at Berkeley College. They share Nolan spends most of his time on the Internet ("everything can an apartment that is owned by Steve. Steve is considering be found online now"). Steve prefers to spend his time talking subscribing to an Internet provider that has the following on the phone rather than using the Internet ("going online is a packages available: waste of time"). They agree that the purchase of the $90 total Package package is a win-win situation. Per Month Requirements A. Internet access $ 75 1. Allocate the $90 between Nolan and Steve using (a) the B. Phone services 25 stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value C. Internet access + phone services method. 2. Which method would you recommend they use and why? $ 90 The goal of these methods is to allocate common costs' to each user in a reasonable way. Let's review each of the three methods: The stand-alone cost-allocation method determines the weights for cost allocation by considering each user of the cost as a separate entity The incremental cost-allocation method ranks the individual users of a cost object in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users. The first-ranked user of the cost object is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user. The second-ranked user is the first incremental user and is allocated the additional cost that arises from two users instead of only the primary user. The Shapley value method allocates the average of the costs allocated as the primary user and as the incremental user. That is to say, it takes the costs from the incremental cost-allocation method and averages those costs for each user. Requirement 1. Allocate the $90 between Nolan and Steve using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method. We will begin by allocating the $90 between Nolan and Steve using (a) the stand-alone cost-allocation method. Recall this method uses the weight of each individual service to allocate the "all-in-one" package cost of$90. (Round your final answers to the nearest cent.) Cost of service the Total of services Total of Stand-alone person uses the most if paid individually "all-in-one" package Nolan Steve Now we will allocate the $90 using (b) the incremental cost-allocation method. Recall that the primary user is allocated all of the costs up to the costs of the service they use (as a stand-alone user). Any "left over" costs are then assigned to the incremental user. In our example we will assume two independent situations. One where Nolan is the primary user and the other where Steve is the primary user. Primary user Incremental user cost Primary user ("All-in-one" package - Primary user cost) Nolan Steve Next allocate the $90 using (c) the Shapley value method. Recall that this method takes the average of the incremental cost- allocation method costs. Be sure to use the costs for each person when they are the primary user and when they are the incremental user, then divide by 2. (Round your answers to the nearest cent.) cost cost
2 = = Costs when they are the Shapley value Primary user Incremental user ) + cost Nolan ( ) + 2 Steve + 2 Requirement 2. Which method would you recommend they use and why? In order to determine which method we should recommend, let's review the advantages and disadvantages of each method. The stand-alone method is viewed as reasonable because each person bears a proportionate share of total costs in relation to the individual stand-alone costs. Is there a better method though? Under the incremental cost-allocation method, the primary user typically receives the highest allocation of the common costs. The difficulty with this is that, particularly if a large common cost is involved, every user would prefer to be viewed as the incremental user. The Shapley value method considers each party as first the primary user and then the incremental user. It allocates costs in a manner that is close to the costs allocated under the stand-alone method but takes a more comprehensive view of the common cost allocation problem by considering primary and incremental users that the stand-alone method ignores. On further review we can also find other criteria to guide common cost allocations: a. Cause and effect. It is not possible to trace individual causes (either Internet access or phone services) to individual effects (uses by Nolan or Steve). The $90 total package is a bundled product b. Benefits received. There are various ways of operationalizing the benefits received: (0) Monthly service charge for their prime interest-Internet access forNolan (975), and phone services for Steve ($25 This measure captures the services available to each person (1) Actual usage by each person. This would involve keeping a record of usage by each person and then allocating the $90 on a percent usage time basis. This measure captures the services actually used by each person, but it may prove burdensome and it would be subject to honest reporting by Steve and Nolan. c. Ability to pay. This criterion requires that Nolan and Steve agree upon their relative ability to pay. d. Faimess or equity. This criterion is relatively nebulous. A straightforward approach would be to split the $90 equally among the two users 1: Definition A common cost is a cost of operating a facility, activity, or like cost object that is shared by two or more users. Common costs exist because each user obtains a lower cost by sharing than the separate cost that would result if such user were an independent entity.