Cost allocation to divisions. Forber Bakery makes baked goods for grocery stores and has three divisions: bread, cake, and doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are as follows:

Human resources (HR) costs $1,900,000

Accounting department costs 1,400,000

Rent and depreciation 1,200,000 Other 600,000

Total costs $5,100,000

The Forber upper management currently allocates this cost to the divisions equally. One of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different indirect costsnumber of employees for HR costs, total revenues for accounting department costs, square feet of space for rent and depreciation costs, and equal allocation among the divisions of other costs. Information about the three divisions follows:

Bread Cake Doughnuts

Total revenues $20,900,000 $4,500,000 $13,400,000

Direct costs 14,500,000 3,200,000 7,250,000

Segment margin $6,400,000 $1,300,000 $6,150,000

# of employees 400 100 300

Sq.feet of space 10,000 4,000 6,000

Required

1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs.

2. Allocate headquarter costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarter costs.

3. Which division manager do you think suggested this new allocation. Explain briefly. Which allocation do you think is better?