Question

Cost allocation and decision making. Reidland Manufacturing has four divisions: Acme, Dune, Stark, and Brothers. Corporate headquarters is in Minnesota. Reidland corporate headquarters incurs costs of $16,800,000 per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:

Stark
Brothers
Acme
Dune
$25,500,000
12,300,000
$13,200,000
12,000
Revenues
$23,400,000
15,900,000
$18,600,000
12,900,000
$16,500,000
13,800,000
Direct costs
$ 7,500,000
$ 5,700,000
4,500
$ 2,700,000
1,500
Segment margin
Number of employees
6,000
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Transcribed Image Text:Stark Brothers Acme Dune $25,500,000 12,300,000 $13,200,000 12,000 Revenues $23,400,000 15,900,000 $18,600,000 12,900,000 $16,500,000 13,800,000 Direct costs $ 7,500,000 $ 5,700,000 4,500 $ 2,700,000 1,500 Segment margin Number of employees 6,000
Required
1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions using
revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate
operating margins for each division after allocating headquarters costs.
2. Which allocation base do you think the manager of the Brothers division would prefer? Explain.
3. What factors would you consider in deciding which allocation base Reidland should use?
4. Suppose the Reidland CEO decides to use direct costs as the allocation base. Should the Brothers divi-
sion be closed? Why or why not?
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Transcribed Image Text:Required 1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs. 2. Which allocation base do you think the manager of the Brothers division would prefer? Explain. 3. What factors would you consider in deciding which allocation base Reidland should use? 4. Suppose the Reidland CEO decides to use direct costs as the allocation base. Should the Brothers divi- sion be closed? Why or why not?
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