Question: Allocation of common costs. Gordon Grimes, a self-employed consultant near Atlanta, received an invitation to visit a prospective client in Seattle. A few days later, he received an invitation to make a presentation to a prospective client in Denver. He decided to combine his visits, traveling from Atlanta to Seattle, Seattle to Denver, and Denver to Atlanta. Grimes received offers for his consulting services from both companies. Upon his return, he decided to accept the engagement in Denver. He is puzzled over how to allocate his travel costs between the two clients. He has collected the following data for regular round-trip fares with no stopovers:
Atlanta to Seattle $600
Atlanta to Denver $400
Grimes paid $900 for his three-leg flight (Atlanta-Seattle, Seattle-Denver, Denver-Atlanta). In addition, he paid $45 each way ($90 total) for limousines from his home to Atlanta Airport and back when he returned.
1. How should Grimes allocate the $900 airfare between the clients in Seattle and Denver using
(a) the stand-alone cost-allocation method,
(b) the incremental cost-allocation method, and
(c) the Shapley value method?
2. Which method would you recommend Grimes use and why?
3. How should Grimes allocate the $90 limousine charges between the clients in Seattle and Denver?