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