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Cost allocation Mollvmook, Inc. is a financial services firm that operates three customer-facing business units (Alpha, Beta, and Gamma divisions). A separate department (Eta group)
Cost allocation Mollvmook, Inc. is a financial services firm that operates three customer-facing business units (Alpha, Beta, and Gamma divisions). A separate department (Eta group) provides back office and risk management services to the three customer-facing business units. The three business units are managed as autonomous profit centers, with profits defined and measured as the total contribution margin (in dollars) earned each quarter. Mollvmook's central management team is considering an alternative measure of business unit profit that would also allocate the (indirect and joint) costs of operating Eta group to each of Alpha, Beta, and Gamma, with profit then defined as pre-tax operating profit after allocation of these indirect costs. A number of possible allocation bases are being considered, including business unit revenues, head count, and variable direct costs. What are the pros and cons of the alternative profit measures contribution margin vs. fully- burdened operating profit and their use to measure and evaluate business unit performance at Mollymook
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