Cost allocation and decision making. Geenbold Manufacturing has four divisions named after it's locations: Arizona, Colorado, Delaware, and Florida. Corporate headquartersis in Minnesota. Greenbold corporate headquarters incurs $5,600,000 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, dir3ect costs, and number of employees. The following is relevant information about each division: Arizona Colorado Delaware Florida Revenues $7,800,000 $8,500,000 $6,200,000 $5,500,000 Direct costs 5,300,000 4,100,000 4,300,000 4,600,000 Segment margin $2,500,000 $4,400,000 $1,900,000 $ 900,000 Number of employees 2,000 4,000 1,500 500
Required:
1. Allocate the indirect headquarter costs of Greenbold Manufacturing to each of the four divisions using revenues, direct costss, 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 Florida division would prefer? Explain
3. What factors would you consider in deciding which allocation base Greenbold should use?
4. Suppose the Greenbold CEO decides to use direct costs as the allocation base. Should the Florida division be closed? Why or why not?