Cost allocation to divisions. Lenzig Corporation has three divisions: Pulp, Paper, and Fibres. Lenzig's new controller, Ari Bardem, is reviewing the allocation of fixed corporate- overhead costs to the three divisions. He is presented with the following information for each division for 2009:

REQUIRED 1. Allocate 2009 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2009 fixed costs using the allocation bases suggested by Bardem. What is each division’s operating margin percentage under the new allocation scheme?
3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?
4. Which allocation scheme should Lenzig Corporation use? Why? How might Bardem overcome any objections that may arise from the divisions?LO1

Transcribed Image Text:

Pulp Paper Fibres Revenues $8,500,000 $17,500,000 $24,000,000 Direct manufacturing costs 4,100,000 8,600,000 11,300,000 Division administrative costs 2,000,000 Division margin $2,400,000 1,800,000 $ 7,100,000 3,200,000 $ 9,500,000 Number of employees 350 250 400 Floor space (square metres) 35,000 24,000 66,000 Until now, Lenzig Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Bardem asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases: Suggested Allocation Bases Number of employees Fixed Corporate- Overhead Costs Human resource management $1,800,000 Facility 2,700,000 .Corporate administration 4,500,000 Floor space (square metres) Division administrative costs Total $9,000,000