A company rents a small building with 10,000 square feet of space for $100,000 per year. The rent is allocated to the company's three departments on the basis of the value of the space occupied by each. Department 1 occupies 1,500 square feet of ground-floor space, Department 2 occupies 3,500 square feet of ground-floor space, and Department 3 occupies 5,000 square feet of second-floor space. If rent for comparable floor space in the neighborhood averages $15.00 per sq. ft. for ground-floor space and $10 per sq. ft. for second-floor space, what annual rent expense should be charged to each department

department 1: $18,000

department 2: $42,000

department 3: $40,000

Explanation:

total annual rent expense $100,000

total rented space 10,000 sq ft

first we must calculate the rental cost based on comparable floor space:

(1,500 x $15) + (3,500 x $15) + (5,000 x $10) = $22,500 + $52,500 + $50,000 = $125,000

now we allocate costs on the following proportion: $100,000 / $125,000 = 0.8

department        comparable rent        proportional cost         total    

1                              $22,500                      0.8                           $18,000

2                             $52,500                      0.8                          $42,000

3                             $50,000                      0.8                          $40,000

total                       $125,000                                                    $100,000