Jet Green Airways historically distributes the indirect costs of lost and damaged baggage to its three major hubs using a basis of annual number of flights in and out of each hub. Last year, $667,500 was distributed as follows:
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The airline’s Baggage Management Director suggests that an allocation on the basis of baggage traffic, not flights, will be better at representing the distribution, primarily based on the fact that the high fees now charged to passengers to check luggage have significantly changed the number of bags handled at the major hubs. Total number of bags handled during the year are 2,490,000 at HUA, 1,582,400 at DFW, and 763,500 at SAT.
What is (a) the activity, and (b) the cost driver for the suggested baggage traffic basis?
(a) Activity is the department at each hub that lose or damage baggage.
(b) Cost driver is the number of bags handled, some of which are lost or damaged.
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