English Realty separates its activities into two operating divisions: Rentals and Sales. In March 2010, the firm spent $21,000 for general company promotions (as opposed to advertisements for specific properties). The corporate controller has decided to allocate general promotion costs to the two operating divisions. She is considering whether to base her allocations on the (1) expected increase in divisional revenue from the promotions or (2) expected increase in divisional profit from the promotions (before allocated promotion costs). General promotions had the following effects on the two divisions:

a. Allocate the total promotion cost to the two divisions using change in revenue.
b. Allocate the total promotion cost to the two divisions using change in profit before joint cost allocation.
c. Which of the two approaches is more appropriate?Explain.

Transcribed Image Text:

Rentals Sales Increase in divisional revenue 350,000 $700,000 Increase in profit (before allocated promotion costs) 56,000 24,000