Question
Finsys offers Web design and website maintenance and hosting for the mutual fund industry. Finsys clients are small mutual funds that do not have scale
Finsys offers Web design and website maintenance and hosting for the mutual fund industry. Finsys clients are small mutual funds that do not have scale economies to design and maintain their own Web portals that their mutual fund investors can access to check account information, receive performance reports on their investments in the fund, and manage their accounts. Finsys uploads real-time information feeds and interfaces with their mutual fund clients IT systems. The Finsys product line consists of various tools and software modules that enable their clients to control their data and content by automating Web content, print production, and securities regulation compliance.
Finsys has four departments: marketing, Web design, website maintenance, and website hosting. The marketing department contacts potential customers to sell Finsys services, prepares bids, and negotiates final contract details. The typical contract is for three years. (Finsys Web design services are priced very competitively to win the initial bid.) The Web design department works with clients to design the Web clients initial website to create the clients brand (i.e., the look and feel of the clients website). The website maintenance department provides day-to-day and end-of-quarter website revisions and data feeds so the mutual fund clients customers have access to the latest information about their accounts. Finally, the website hosting department maintains the secure servers that contain the clients mutual funds data and provides security against hackers and backup. Mutual fund clients of Finsys pay separately for Web design services, website maintenance, and website hosting.
Web design, website maintenance, and website hosting are profit centers, and the managers of these profit centers are rewarded based on their departments operating income. In addition to the four departments, Finsys has an administration department consisting of the CEO, CFO, human resources, and accounting. The following data summarize Finsyss current operating performance:
Web Design | Web Maintenance | Web Hosting | Total | |
Revenue | $ 650,000 | $1,240,000 | $1,180,000 | $3,070,000 |
Operating expenses | (610,000) | (887,000) | (239,000) | (1,826,000) |
Operating income | $ 40,000 | $ 353,000 | $ 851,000 | $1,244,000 |
Marketing | (446,000) | |||
Administration | (698,000) | |||
Net income | $ 100,000 |
Currently, Finsys does not allocate the marketing and administration costs to the three profit centers. The CEO and CFO believe that the three profit centers operating profits are not indicative of the real profits of these profit centers because the profit centers are not bearing any of the marketing and administration expenses. The CEO and CFO propose allocating the marketing and administration costs back to the three profit centers based on the percentage of the profit centers revenues to Finsyss total revenue.
QUESTION: Prepare a revised set of financial statements that report each profit centers net income after allocating the marketing and administration costs back to the three profit centers using revenues as the allocation base. Show all calculations to derive answers.
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