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16 May, 21:25

A company rents a small building with 10,000 square feet of space for $100,000 per year. The rent is allocated to the company's three departments on the basis of the value of the space occupied by each. Department 1 occupies 1,500 square feet of ground-floor space, Department 2 occupies 3,500 square feet of ground-floor space, and Department 3 occupies 5,000 square feet of second-floor space. If rent for comparable floor space in the neighborhood averages $15.00 per sq. ft. for ground-floor space and $10 per sq. ft. for second-floor space, what annual rent expense should be charged to each department

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  1. 16 May, 21:29
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    department 1: $18,000

    department 2: $42,000

    department 3: $40,000

    Explanation:

    total annual rent expense $100,000

    total rented space 10,000 sq ft

    first we must calculate the rental cost based on comparable floor space:

    (1,500 x $15) + (3,500 x $15) + (5,000 x $10) = $22,500 + $52,500 + $50,000 = $125,000

    now we allocate costs on the following proportion: $100,000 / $125,000 = 0.8

    department comparable rent proportional cost total

    1 $22,500 0.8 $18,000

    2 $52,500 0.8 $42,000

    3 $50,000 0.8 $40,000

    total $125,000 $100,000
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