Question

Heart & Home Properties is developing a subdivision that includes 600 home lots. The 450 lots in the Canyon section are below in ridge and do not have views of the neighboring Canyon and hills: the 150 lots in the Hilltop section after unobstructed views. The excepted selling price for each Canyon lot is $55, 000 and for each Hilltop lot is $110, 000. The developer acquired the land for $4, 000, 000 and spent another $3, 500, 000 on street and utilities improvements. Assign the joint land and improvement costs to the lots using the value basis of allocation and determine the average costs per lot.

Answer 1

Each Canyon lot will cost = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000

Step-by-step explanation:

When you allocate joint costs using the value basis method, the costs will be allocated to the different products using their sales value:

total costs = $4,000,000 + $3,500,000 = $7,500,000

total sales value = (450 lots x $55,000) + (150 lots x $110,000) = $24,750,000 + $16,500,000 = $41,250,000

total costs allocated per $1 of sales value = $7,500,000 / $41,250,000 = $0.181818

Each Canyon lot will cost = $0.18181818 x $55,000 = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $0.18181818 x $110,000 = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000