Cost allocation to divisions. Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook's new controller, Paul Weber, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2013:
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Pulp
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Paper
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Fibers
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Revenues
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$ 9,800,00
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$17,100,000
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$25,500,000
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Direct manufacturing costs
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3,500,000
|
7,800,000
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11,100,000
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Division administrative costs
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3,300,000
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2,000,000
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4,700,000
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Division margin
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$3,000,000
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$ 7,300,000
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9,700,000
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Number of employees
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300
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150
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550
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Floor space (square feet)
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53,200
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35,340
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101,460
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Until now, Holbrook Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Weber asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:
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Fixed Corporate Overhead Costs
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Suggested Allocation Bases
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Human resource management
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$ 2,300,000
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Number of employees
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|
Facility
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3,200,000
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Floor space (square feet)
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|
Corporate administration
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4,600,000
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Division administrative costs
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Total
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$10,100,000
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1. Allocate 2013 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2013 fixed costs using the allocation bases suggested by Weber. What is each division's operating margin percentage under the new allocation scheme?
3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operat¬ing margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?
4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber overcome any objections that may arise from the divisions?