Hall Auto Sales uses all types of media to advertise its products (television, radio, newspaper, and so on). At the end of 2016, the company president, Tina Hall, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company’s four sales locations based on number of vehicles sold. Tina was confident that her corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. Tina budgeted total advertising cost for 2017 to be \($1.7\) million. She introduced the new plan to her sales managers just before the New Year. The manager of the east sales location, Lee Chan, was not happy. He complained that the new allocation method was unfair and would increase his advertising costs significantly over the prior year. The east location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales. Following Lee’s complaint, Tina decided to take another hard look at what each of the divisions was paying for advertising before the new allocation plan. The results were as follows:

1. Using 2016 data as the cost bases, show the amount of the 2017 advertising cost (\($1,700,000)\) that would be allocated to each of the divisions under the following criteria:

a. Davenport’s allocation method based on number of cars sold

b. The stand-alone method

c. The incremental-allocation method, with divisions ranked on the basis of dollars spent on advertising in 2016 

2. Which method do you think is most equitable to the divisional sales managers? What other options might President Tina Hall have for allocating the advertising costs?

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Sales Location Actual Number of Cars Sold in 2016 Actual Advertising Cost Incurred in 2016 $ 261,600 East 4,620 West 1,120 392,400 North 3,220 697,600 South 5,040 828,400 14,000 $2,180,000