Allocation of Administrative Costs Wical Rental Management Services manages four
ID: 2746645 • Letter: A
Question
Allocation of Administrative Costs Wical Rental Management Services manages four apartment buildings, each with a different owner. Wical’s CEO has observed that the apartment buildings with more expensive rental rates tend to require more of her time and also the time of her staff. The four apartment buildings incur a total annual operating expense of $7,345,733, and these operating expenses are traced directly to the apartment buildings for the purpose of determining the profit earned by the building owners. The annual management fee that Wical earns is based on a percentage of total annual operating expenses and is negotiated each year. For the current year the fee rate is 6%, and Wical has the following information for current year average rental rates and occupancy rates.
Required Answers - please show math
1. For the current year, Wical must choose between the number of units in each complex, the average occupancy, or the total annual rental revenue in each complex to allocate the management fee. Explain your choice of method and show how much of the management fee would be allocated to each apartment building using your method.
2. What ethical issues, if any, are involved in the choice of method in requirement 1?
Explanation / Answer
Based on the details provided in the question first we will try to find the expected revenue from each apartment and the percentage of total revenue each apartment which is calculated and shown in below table
Apartment Complex
# of Units
Average Occupancy
Average Rent
Total Expected Revenue
Percentage of total Revenue
Cape Point
100
88%
$1,895
$166,760
20.43%
Whispering Woods
250
77%
$1,295
$249,288
30.54%
Hanging Rock
200
72%
$995
$143,280
17.55%
College Manor
350
82%
$895
$256,865
31.47%
Total
900
$816,193
100.00%
So based on the total Revenue generated by each Apartment we can easily see that College Manor Apartment generates the highest percentage of Revenue for the Organization even though its rental is minimum so they should allocate the Management fees also based on the same percentage criteria.
Total Annual Operating Cost : 7,345,733
Management Fees is 6% of Total Operating Cost : 7,345,733 * 0.06 = 440743.98 = 440744
This amount must be allocated based on the Percentage of Total Revenue as seen in below chart
Apartment Complex
Percentage of total revenue
Fees Allocation
Cape Point
20.43%
90050
Whispering Woods
30.54%
134615
Hanging Rock
17.55%
77371
College Manor
31.47%
138707
Total
100.00%
440744
Total Fees
440744
While using the Total Revenue generation for allocation of management fees we can see couple of ethical issues which can change ones mindset for the allocation criteria.
1-Average Rent is the highest for the Cape Town but still they are allocated lower fees
2-College Manor has minimum Average Rent but still they are allocated with the maximum fees
3-Similarly Cape Town has the highest Average Occupancy and are allocated lower fees.
But all these above ethical issues can be ignored seeing the Expected Revenue generation for each Apartment.
Apartment Complex
# of Units
Average Occupancy
Average Rent
Total Expected Revenue
Percentage of total Revenue
Cape Point
100
88%
$1,895
$166,760
20.43%
Whispering Woods
250
77%
$1,295
$249,288
30.54%
Hanging Rock
200
72%
$995
$143,280
17.55%
College Manor
350
82%
$895
$256,865
31.47%
Total
900
$816,193
100.00%
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