Allocation of Marketing and Administrative Costs; Profit SBUs Tilton Academy allocates market- ing and administrative costs to its three schools based on total annual tuition revenue for the schools. In 2009 the allocations (000s omitted) were as follows:
|
Lower School
|
Middle School
|
Upper School
|
Total
|
|
Tuition revenue
|
$1,500
|
$500
|
$2,000
|
$4,000
|
|
Marketing and administration
|
375
|
125
|
500
|
$1,000
|
In 2010, the middle and upper schools experienced no change in revenues, but the lower school's tuition revenue increased to $1.9 million. Marketing and administrative costs rose to $1,250,000.
Required
1. Using revenue as an allocation base, how should the costs be allocated for 2010?
2. What are the shortcomings of this allocation formula?