Evaluating selling and administrative cost allocations Gordon Gecco Furniture Company has two major product lines with the following characteristics: Commercial office furniture: Few large orders, little advertising support, shipments in full truckloads, and low handling complexity Home office furniture: Many small orders, large advertising support, shipments in partial truckloads, and high handling complexity The company produced the following profitability report for management: Gordon Gecco Furniture Company Product Profitability Report For the Year Ended December 31 Commercial Home Office Office Furniture Furniture Total Revenue $5,600,000 $2,800,000 $8,400,000 $ Cost of goods sold (2,100,000) (980,000) (3,080,000) Gross profit $3,500,000 $1,820,000 $5,320,000 Selling and administrative expenses (1,680,000) (840,000) (2,520,000) Operating income $1,820,000 $ 980,000 $2,800,000 The selling and administrative expenses are allocated to the products on the basis of relative sales dollars. Evaluate the accuracy of this report and recommend an alternative approach. The selling and administrative expenses should on the basis of relative sales dollars. The two product lines have very different attributes. The commercial product is relatively inexpensive to sell, while the home product has a number of additional costs associated with it. As a result, allocating selling and administrative expenses using sales volumes would allocate selling and administrative expenses to the commercial product and to the home product. The commercial product would receive as much selling and administrative expenses as the home product because it has twice the sales. An activity-based approach would trace the selling and administrative costs to the products based upon their actual consumption of activities. Such an allocation would show the commercial product to be more profitable than indicated and the home product to be less profitable than indicated