15-36 Cost-hierarchy income statement and allocation of corporate costs to customers. ISPStar offers Internet , phone, and television services to customers in Wyoming. It has two divisions, an Urban Division catering to urban customers and a Rural Division catering to rural customers. Currently, the company allocates corporate overhead on the basis of revenues of the two divisions. Harvey Leonard, ISPStar's president, believes that this method of allocation does not adequately capture the demands that the two divisions put on corporate resources. He proposes developing a cost-hierarchy income statement and also an income statement allocating corporate overhead costs based on the number of service hours used in the two divisions. The Rural Division has a higher number of service hours because service personnel have to travel longer distances to reach customers. The following information is available for the forthcoming period: Revenue Customer-level costs Customer-level operating income Customer-level operating income percentage Service-hours worked Urban Division $4,840,000 2,800,000 $2,040,000 42.15% 6,000 hours Rural Division $3,960,000 2,700,000 $1,260,000 31.82% 12,000 hours Total $8,800,000 5,500,000 $3,300,000 37.5% 18,000 hours In addition to the customer-level costs above, the company expects to incur $2,250,000 of corporate costs. 1. Prepare a cost-hierarchy income statement for ISPStar using the format in Exhibit 15-7. assuming cor- porate costs are not allocated to each division. 2 Allocate the corporate costs to each division and calculate the income of each division after assigning corporate costs based on revenues of each division. 3. Allocate the corporate costs to each division and calculate the income of each division after assigning corporate costs based on service-hours worked in each division. 4. What are the advantages and disadvantages of ISPStar allocating corporate overhead costs to the two divisions? 5. Based on your answers to requirements 1 through 4, should Leonard close down the Rural Division? Explain