America Connect offers Internet, phone, and television services to customers in Wyoming. (Click the icon to view additional information.) The following information is available for the forthcoming period: (Click the icon to view the information.) Read the More info 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, America Connect'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. Data table Requirement 1. Prepare a cost-hierarchy income statement for America Connect assuming corporate costs are not allocated to each division. (Use parentheses or a minus sign to enter an operating loss.) \begin{tabular}{l|r|r|r|r|} \multicolumn{1}{c}{ Income Statement Component } & Urban & \multicolumn{1}{c}{ Rural } & \multicolumn{1}{c}{ Total } \\ \hline \hline Revenues & 5,452,000 & 3,948,000 & 9,400,000 \\ \hline Customer-level costs & 2,700,000 & 2,600,000 & 5,300,000 \\ \hline Customer-level operating income & 2,752,000 & 1,348,000 & 4,100,000 \\ \hline Corporate costs & & & 2,300,000 \\ \hline Operating income (loss) & & 1,800,000 \\ \hline \end{tabular} Requirement 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. (Do not round intermediary calculations. Only round the amounts you input in the cells to the nearest dollar. Use parentheses or a minus sign to enter an operating loss.) Requirement 4. What are the advantages and disadvantages of America Connect allocating corporate overhead costs to the two divisions? Advantages of allocating corporate costs: (Select all that apply) A. Corporate administration costs always have a very strong cause-and-effect relationship with regional revenues which is the basis used to allocate corporate costs to customers. Allocating corporate costs will then serve an important purpose for decision making, performance evaluation, or motivation. B. The full costs of supporting the sales of products to customers are included when determining customer-level profitability. In the long run, customers (and products) must be profitable on a full-cost basis, if the company is to be profitable. C. Managers and salespersons servicing individual customer accounts have complete control over these costs and therefore are motivated by the allocation of these costs to their region. D. Allocating all costs motivates managers and salespersons servicing individual customer accounts to examine how corporate costs are planned and controlled. These managers and salespersons want to understand whether these costs are providing them benefits in line with their costs. Are the corporate costs supporting better distribution of products to customers? Are the marketing activities increasing the demand for products by customers? E. Allocating all costs to customers (divisions) is to encourage long-run prices to be set to cover the cost of all resources used to produce and sell products to customers. Full-cost allocation reduces the temptation of companies to cut prices to simply cover partial (or variable) costs. Disadvantages of allocating corporate costs: (Select all that apply) A. Allocating all costs to customers (regions) discourages long-run prices from covering the cost of all resources used to produce and sell products to customers. Full-cost allocation increases the temptation of companies to cut prices to simply cover partial (or variable) costs. B. Corporate administration costs may have a very weak cause-and-effect relationship with regional revenues which is the basis used to allocate corporate costs to customers. Allocating corporate costs will then serve little useful purpose for decision making, performance evaluation, or motivation. C. Managers sometimes prefer not to allocate corporate costs to customers because changes in customer behavior will have no effect on these costs. For example, only decisions pertaining to the company as a whole will influence these costs. D. Designing and implementing complex cost-allocation systems and helping managers understand the system come at a cost. These costs must be weighed against the benefits of better pricing and cost-control decisions, which are sometimes difficult to measure. However, as the costs of collecting and processing information decrease, companies are more easily able to justify more-complex cost allocations. E. Salespeople responsible for managing individual customer accounts would lose motivation if sales bonuses were adversely affected as a result of allocating to customers costs over which they had minimal influence. This is the controllability principle. Even if the salesperson benefited from the corporate costs, he or she would have no say in ("would not be responsible for") how much of these costs to use or what they would cost. F. The full costs of supporting the sales of products to customers are not included when determining customer-level profitability. In the long run, customers (and products) must be profitable on a full-cost basis, if the company is to be profitable. Allocating corporate costs does not provide the full costs. A. America Connect should only close down the Rural Division if the corporate costs saved by dropping the division are more than the $2,600,000 of customer-level costs that the Rural Division incurs. The allocated costs are irrelevant. B. Allocating corporate costs gives the misleading impression that potential cost savings from dropping a division are greater than the likely amount. America Connect should only close down the Rural Division if the corporate costs saved by dropping the division are more than the $3,948,000 of customer-level revenue that the Rural Division generates, less the allocated corporate costs of $1,495,000. The allocated costs are relevant and should be subtracted from the revenue. C. America Connect should only close down the Rural Division if the corporate costs saved by dropping the division are more than the $1,348,000 of customer-level operating that the Rural Division generates. The allocated costs are irrelevant. D. After allocating corporate costs using service-hours worked as the allocation base, the Rural division shows a loss. The current costs are past costs and so are irrelevant for making any decision. Assuming that the customer-level operating income for the Rural Division is expected to look similar to the past year's costs in the future, America Connect should close down the Rural Division if the division is expected to produce an operating loss