Problem:
A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses, etc. (total sales of $150M), and the other sells bicycles to the public (total sales of $20M). The unicycle business occupies 75,000 square feet of the manufacturing warehouse and the bicycle business occupies the remaining 25,000 square feet. Cost were split 50-50 between the 2 businesses for advertising (total advertising expense of $5M) and warehouse expense (total warehouse expense of $3M) in the past (traditional method).
Question 1: What was the cost of advertising and warehouse expense allocated to each of the business based on the traditional method?
Question 2: What recommendation would you make in allocating these expenses to each of the business and how much would be allocated to each business?
Question 3: What would be some of the issues of too many expenses or too little expenses being allocated to each of the businesses?