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.
Using the baggage traffic basis, determine the IDC rate (to the nearest 0.1¢) using last year’s total of $667,500 and allocate this amount to the hubs this year.
Total bags handled = 4,835,900
IDC allocation rate = 667,500/4,835,900 = $0.13803 per bag handled (~13.8¢/bag)
Use 13.8¢ per bag checked and handled
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