1. Financial Incentives and Auto Repair/Inspections Companies Some states in the United States are finding increased pressure from citizen groups and other organizations to increase efforts to reduce carbon emissions. One of the key producers of carbon emissions is the automobile, so that some states have become more strict in implementing auto inspection procedures that include compliance with emissions standards. The goal is to reduce emissions overall in the vehicles operating in the state. Some environmental groups that support the emissions tests have suggested that the finan- cial incentive for those inspecting vehicles is to be strict with the testing because any failed tests would require some repair that could then be performed by the inspector. However, recent research shows the unexpected-the Environmental Protection Agency (EPA) estimates that approximately 50 percent of inspections for which the vehicle fails to comply with state-level emission standards are allowed to pass the inspection without the repair needed for compliance. In most states, vehicle inspections are performed by auto mechanics, auto dealers, and other companies that repair autos.
Required: Develop a brief explanation of the finding that many inspections were not in compliance with state standards. What incentives are necessary to improve the rate of compliance? Are there ethical issues you identify in developing your answer?
2. Allocation of Central Costs; Profit centers Holiday Resorts, Inc. operates four resort hotels in the heavily wooded areas of eastern Texas. The resorts are named after the predominant trees at the resort: Oak Glen, Birch Glen, Mimosa, and Walnut Arbor. Holiday allocates its central office costs to each of the four hotels according to the annual revenue it generated. For the current year, these costs (000s omitted) were as follows:
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Front office personnel (desk, clerks, etc.)
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$6,000
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Administrative and executive salaries
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4,000
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Interest on resort purchase
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2,000
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Advertising
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600
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Housekeeping
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1,000
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Depreciation on reservations computer
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80
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Room maintenance
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800
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Carpet-cleaning contract
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50
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Contract to repaint rooms
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400
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Total
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$14,930
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Required
1. Based on annual revenue, what amount of the central office costs are allocated to each hotel? What are the shortcomings of this allocation method?
2. Suppose that the current method were replaced with a system of four separate cost pools with costs col- lected in the four pools allocated on the basis of revenues, assets invested in each hotel, square footage, and number of rooms, respectively. Which costs should be collected in each of the four pools?
3. Using the cost pool system in requirement 2, how much of the central office costs would be allocated to each hotel? Is this system preferable to the single-allocation base system used in requirement 1? Why or why not?