Problem 6-1

Icon.com sells software and provides consulting services to companies that conduct business over the Internet.The company is organized into two lines of business (software and consulting), and profit statements are prepared as follows:

Software

Consulting

Sales

$ 15,000,000

$ 8,000,000

Less direct costs

$ 600,000

$ 4,000,000

Less allocated costs

$ 5,250,000

$ 1,750,000

Income before taxes

$ 3,750,000

$ 2,250,000

Direct costs include costs that are easily associated with each line of business. For software, this includes the salary of programmers, the cost of computers used by programmers, and the cost of

software manuals sold to customers. For consulting, direct costs include consultant salaries, com- puter costs, and travel costs. Allocated costs include costs that are not directly traced to the busi- ness units. These costs include employee benefits, rent, telecommunications costs, and general and administrative costs, such as the salary of the CEO of Icon.com.

At the start of 2014, allocated costs were estimated as follows:

Employee benefits

$ 2,500,000

Rent

$ 1,000,000

Telecommunications

$ 500,000

General and administrative costs

$ 3,000,000

Total

$ 7,000,000

In the past, allocations have been based on headcount (the number of employees in each busi- ness unit). Software had 375 employees and consulting had 125 employees. The new controller of Icon.com believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Icon.com rents 40,000 square feet; approximately 20,000 is occupied by software employees and 20,000 by consulting personnel.

Required

a. Prepare profit reports for software and consulting assuming the company allocates costs using headcount, space occupied, and sales as allocation bases. Compare the new levels of profit to the levels that result using a single allocation base (headcount). Round to six decimal places.

b. Which provides the best informationon profitability:a single overhead cost pool with headcount as the allocation base, or multiple cost pools using headcount, sales, and space occupied? **Please show formulas in Excel and attach if possible for (a). Thank you :)**