Allocation of Administrative Costs Wical Rental Management Services manages four apartment buildings, each with a different owner. Wical's top management 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 monthly operating expense of $7,345,733, and these operating expenses are traced directly to the apartments buildings for the purpose of determining the profit earned by the building owners. The management fee that Wical earns is based on a percentage of total operating expenses and is negotiated each year. For the current year the fee rate is 6 percent, and Wical has the following information for the month of November, including average rental rates and occupancy rates.
|
Apartment Complex
|
Number of Units
|
Average Occupancy
|
Average Rent
|
|
Cape Point
|
100
|
88.0%
|
$1,895
|
|
Whispering Woods
|
250
|
77.0
|
1,295
|
|
Hanging Rock
|
200
|
72.0
|
995
|
|
College Manor
|
350
|
82.0
|
895
|
|
Total
|
900
|
|
|
Required
1. Assuming November is a representative month for the year, how should the annual management fee be allocated to the four apartment buildings? 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 part 1 above?