Blueback Manufacturing has four divisions named after its locations: China, Cambodia, Bangladesh, and India. Corporate headquarters is in Minnesota. Blueback corporate headquarters incurs $8,400,000 per period, which is an indirect cost of the divisions. Each division manager is evaluated on their performance on the basis of the division margin after allocation of the indirect headquarters costs. 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:

Required

1. Allocate the indirect headquarters costs of Blueback 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 India division would prefer? Explain.
3. What factors would you consider in deciding which allocation base Blueback should use?
4. Suppose the Blueback CEO decides to use direct costs as the allocation base. Should the India division be closed? Why or why not?

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Revenues Direct costs Segment margin Number of employees China $11,700,000 7,950,000 $3,750,000 3,000 Cambodia Bangladesh India $9,300,000 $8,250,000 6,450,000 6,900,000 $2,850,000 $1,350,000 2,250 750 $12,750,000 6,150,000 $6,600,000 6,000