Consider a bank that offers both online and branch access for customers. The accountant conducts segment profitability analyses (i.e., online and traditional branch-access segments) and allocates the headquarters costs based on the revenues of online transactions or the transactions completed in branches. Based on the costs of service, the bank has decided that it should motivate customers to use online services in place of branch services. After a campaign of several months, they have persuaded over 50 percent of their customers to use the online service for most of their business. The segment profitability analysis shows that the profitability of branch-access segment has decreased following the campaign, and online-segment profitability has improved. However, with the latest profit report, it appears that the bank-wide is actually making lower profits than before the campaign.

Requirements:

1.What might be the reason that the "bank-wide" profit has decreased? (3 marks)

2.Misallocation of "headquarter costs" can distort the segment profitability. Is segment revenue a good cost driver to allocate headquarters cost? Examples are required to support the explanation. (4 marks)

3.Misallocation of "sales/revenues" also has the potential to distort the segment profitability. Provide an example to illustrate how misallocation of revenues would happen in this case and explain which segment's revenue is likely to be under-allocated. (3 marks)

4.(a) What adjustment would you propose to correct the problems identified in (2) and (3) in the preparation of a segment profitability report? (b) Suppose you have implemented the proposed adjustment, would you drop the segment that reports a loss based on the segment profitability report? (5 marks)