LOHREY Corporation is a decentralized company, divided into 2 divisions, Division A and Division B. The centralized Help Desk of LOHREY budgeted expenses of $300,000 and 10,000 hours of service for 2011. It was estimated that Division A would use 4,500 hours of Technology Support Department service, while Division B budgeted 5,500 hours of Technology Support Department service.

9,800 hours were actually used, 4,900 of which were attributable to Division A. Additional information for the company's two divisions are as follows:

Division Division AB

Sales $3,200,000

$3,305,000 1,764,000 235,000

$1,306,000 $2,000,000

Cost of goods sold Selling expenses Operating income before

service department charges Average Invested assets

1,610,000 264,000

$1,326,000 $3,500,000

1. The specific reason (specific to service department allocation) why the company would use budgeted costs to allocate to user departments rather than actual costs is: (do NOT say that they do not know the costs yet).

 _______________________________________________________________________ _______________________________________________________________________ 

1. In deciding how to allocate the costs of the Help Desk function, what would be the most logical allocation base, given the information above?

 _______________________________________________ 

1. What characteristic does this allocation base possess that makes it an appropriate method to distribute these costs? (Why is this a good allocation base?)

 __________________________________________________________ 

1. The "charge rate" for technology support services at LOHREY is: (include units) $____________________
2. Why would the company operate a Help Desk department, as opposed to allowing the divisions to handle this function separately on their own?

 ______________________________________________________________________ ______________________________________________________________________ 

1. The amount of technology support costs allocated to the divisions A and B would be:
2. Division A $_______________ Division B $_________________

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1. The income from operations AFTER service department charges for the two divisions would be:
2. Division A $________________ Division B $________________
3. The investment turnover for the Division A would be: (round to 2 decimal places)
4. _____________ times
5. The profit margin of the Division B is:
6. __________________% (round to nearest percent)
7. Assume that the company has a potential investment project that will require an investment of $1,500,000 and has a projected return of $500,000. Each division would split the investment and income equally. If divisional performance is based on ROI, which divisional managers would be in favor of this proposal?

 _______________________________ 

1. Management has determined that its average cost of capital is 10% and is using this as a benchmark or hurdle rate evaluate the divisional performance. They wish to use the residual income method to determine evaluate divisional performance According to this measure, which division is performing betterand by how much.

 ____________________________________________ 

52. The principal cause of the lower turnover for the Division A is: ____________________________________________________________________________ ____________________________________________________________________________