Allocation of Administrative Costs Wical Rental Management Services manages four

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?

Apartment Complex # of Units Average Occupancy Average Rent Cape Point 100 88% $1,895 Whispering Woods 250 77% $1,295 Hanging Rock 200 72% $995 College Manor 350 82% $895 Total 900

Explanation / Answer

1. Basis the given information, the best method for allocation of Wical's management fee is to do proportionate to the total annual rental revenue of each apartment complex

2. The only ethical issue could be that while the allocation is done on the basis of total annual rental revenue, considering the premise that Wical's staff has to spend more time on high rent apartments. But the time and effort by staff may not be as propotionately high as the annual revenue . So high rentl apartments will have to bear of the expenses, which may lead the owners to further increase the rental rates of these apartments in an effort to recover the expenses.

Total Annual Operating Expenses $7,345,733 Wical's mgmt fee @ 6% $440,744 Apartment Complex # of Units (N) Average Occupancy (O) Average Rent (R) Total Annual Rental Revenue = N*O*R Allocation of Wical mgmt fee Cape Point 100 88% $1,895 $166,760 $90,050 Whispering Woods 250 77% $1,295 $249,288 $134,615 Hanging Rock 200 72% $995 $143,280 $77,371 College Manor 350 82% $895 $256,865 $138,707 Total 900 $816,193 $440,744

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