Pulp $19,600,000 Paper Fibers Revenues $34,200,000 $51,000,000 Direct manufacturing costs Division administrative costs 7,000,000 15,600,000 22,200,000 6,600,000 $ 6,000,000 600 4,000,000 9,400,000 Division margin Number of employees Floor space (square feet) $14,600,000 300 $19,400,000 1,100 106,400 70,680 202,920 Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Fixed Corporate-Overhead Costs Suggested Allocation Bases Number of employees Floor space (square feet) $ 4,600,000 Human resource management Facility Corporate administration 6,400,000 Division administrative costs 9,200,000 Total $20,200,000 Required 1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? 2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division's oper- ating margin percentage under the new allocation scheme? 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating 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 Bergen Corporation use? Why? How might Fisher overcome any objec- tions that may arise from the divisions?

Question

Cost allocation to divisions. Bergen Corporation has three divisions: pulp, paper, and fibers. Bergen’s new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017:

Pulp
$19,600,000
Paper
Fibers
Revenues
$34,200,000
$51,000,000
Direct manufacturing costs
Division administrative costs
7,000,000
15,600,000
22,200,000
6,600,000
$ 6,000,000
600
4,000,000
9,400,000
Division margin
Number of employees
Floor space (square feet)
$14,600,000
300
$19,400,000
1,100
106,400
70,680
202,920
Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the divisions on the basis
of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the
following new allocation bases:
Fixed Corporate-Overhead Costs
Suggested Allocation Bases
Number of employees
Floor space (square feet)
$ 4,600,000
Human resource management
Facility
Corporate administration
6,400,000
Division administrative costs
9,200,000
Total
$20,200,000
Required
1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the alloca-
tion base. What is each division's operating margin percentage (division margin minus allocated fixed
corporate-overhead costs as a percentage of revenues)?
2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division's oper-
ating margin percentage under the new allocation scheme?
Expand
Transcribed Image Text

Pulp $19,600,000 Paper Fibers Revenues $34,200,000 $51,000,000 Direct manufacturing costs Division administrative costs 7,000,000 15,600,000 22,200,000 6,600,000 $ 6,000,000 600 4,000,000 9,400,000 Division margin Number of employees Floor space (square feet) $14,600,000 300 $19,400,000 1,100 106,400 70,680 202,920 Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Fixed Corporate-Overhead Costs Suggested Allocation Bases Number of employees Floor space (square feet) $ 4,600,000 Human resource management Facility Corporate administration 6,400,000 Division administrative costs 9,200,000 Total $20,200,000 Required 1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? 2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division's oper- ating margin percentage under the new allocation scheme?

3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are
based on operating 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 Bergen Corporation use? Why? How might Fisher overcome any objec-
tions that may arise from the divisions?
Expand
Transcribed Image Text

3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating 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 Bergen Corporation use? Why? How might Fisher overcome any objec- tions that may arise from the divisions?

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