A company must allocate corporate overhead costs of $500,000 between two product divisions, the hardware division and the software division. Before the allocation of corporate overhead summary income statements for the two divisions showed the following:

	Hardware	Software	Total
Sales	$ 1,000,000	$ 2,500,000	$ 3,500,000
Cost of goods sold	(700,000)	(1,375,000)	$ (2,075,000)
Gross profit	300,000	1,125,000	$ 1,425,000
Selling, general and administrative expenses	(200,000)	(450,000)	$ (650,000)
Net Income before overhead allocation and taxes	100,000	675,000	$ 775,000

Corporate overhead is currently allocated 50/50 between the two divisions and both division presidents feel that allocation is unfair. The president of the hardware division feels that corporate overhead cost should be allocated based on net income before overhead allocation and taxes. The president of the software division feels that the allocation should be based on non-financial variables like the number of employees in each division. The hardware division employs 200 managers, engineers, installers and maintenance personnel while the software division employs 80 software engineers and project managers.

Required:

1. Compute net income after overhead allocation and before taxes based on net income, and number of employees
2. Select one of the two methods and describe the positive incentives and perverse incentives that each would produce and then select the method that you would implement and explain why.