More Info Under the existing accounting system, costs incurred at corporate headquarters are collected in a single cost pool ($1.15 million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division-income bonus pool. Division income is defined as operating income less allocated corporate costs. Smole has analyzed the components of corporate costs and proposes that corporate costs be collected in four cost pools. Lucy Smole, controller of the Wonderful Snacks, is preparing a presentation to senior executives about the performance of its four divisions. Summary data related to the four divisions for the most recent year are as follows: (Click the icon to view the summary data.) (Click the icon to view more information.) The components of corporate costs for the most recent year and Smole's suggested cost pools and allocation bases are as follows: (Click the icon to view the suggested cost pools and allocation bases.) Read the requirements. Requirement 1. Select two reasons why Wonderful Snacks should allocate corporate costs to each division. A. To determine the likelihood of customer retention. B. To quantify the potential for sales growth. C. Income measurement for external parties. D. To provide information for economic decisions. Data Table 11 Corporate Cost Category 12 Interest on debt 13 Corporate salaries B Amount Suggested Cost Pool $ 485,000 Cost Pool 1 140,000 Cost Pool 2 150,000 Cost Pool 2 Suggested Allocation Base Identifiable assets Division revenues 14 Accounting and control 15 General marketing 130,000 Cost Pool 2 16 Public affairs 125,000 Cost Pool 3 120,000 Cost Pool 4 18 Total $1,150,000 17 Personnel and payroll Positive operating income* Number of employees *Smole proposes that this cost be allocated using operating income (if positive) of divisions, with 19 only divisions with positive operating income included in the allocation base. Print Done Requirements 1. Select two reasons why Wonderful Snacks should allocate corporate costs to each division. 2. Calculate the operating income of each division when all corporate costs are allocated based on revenues of each division. 3. Calculate the operating income of each division when all corporate costs are allocated using the four cost pools. 4. How do you think the division managers will receive the new proposal? What are the strengths and weaknesses of Smole's proposal relative to the existing single-cost-pool method? Data Table A B C D E F 1 2 DIVISIONS Candy Nuts Crackers Cookies Total 3 Revenue $ 1,332,000 $ 1,080,000 $ 612,000 $ 576,000 $3,600,000 4 Operating Costs 767,840 450,240 616,500 457,920 2,292,500 5 Operating Income $ 564,160 $ 629,760 $ (4,500) $ 118,080 $1,307,500 6 Identifiable assets $ 2,387,000 $ 2,849,000 $ 7 Number of employees 6,720 8,820 1,463,000 $ 4,200 1,001,000 $ 7,700,000 1,260 21,000