Allocation of common costs. Jim Dandy Auto Sales uses all types of media to advertise its products (television, radio, newspaper, etc.). At the end of 2011, the company president, Jim Dandridge, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company's three sales locations based on number of vehicles sold. Jim was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. Dandridge budgeted total advertising cost for 2012 to be $1.8 million. He introduced the new plan to his sales managers just before the New Year.
The manager of the east sales location, Tony Snider, was not happy. He complained that the new allocation method was unfair and would increase his advertising costs significantly over the prior year. The east location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales.
Following Tony's complaint, Jim decided to take another hard look at what each of the divisions were paying for advertising before the new allocation plan. The results were as follows:
Required
1. Using 2011 data as the cost bases, show the amount of the 2012 advertising cost ($1,800,000) that would be allocated to each of the divisions under the following criteria:
a. Dandridge's allocation method based on number of cars sold
b. The stand-alone method
c. The incremental-allocation method, with divisions ranked on the basis of dollars spent on advertising in 2011
2. Which method do you think is most equitable to the divisional sales managers? What other options might President Jim Dandridge have for allocating the advertising costs?