PROBLEM 6-2. Number of Cost Pools [LO 1] The Kiddo Company manufactures and ships

children's stuffed animals across the nation. The following are profit statements for the company's

two lines of business:

Stock Stuffed Animals Custom Stuffed Animals

Sales $7,500,000 $5,000,000

Less direct costs. 2,500,000 4,000,000

Less allocated costs 3,375,000 1,125,000

Income (loss) before taxes $1,625,000 ($ 125,000)

Costs that are easily associated with each line of business are included in the direct costs.

Allocated costs include costs that are not directly traced to the business units. These costs include

employee benefits, rent, telecommunications costs, and general and administrative costs, such as

the salary of the CEO of Kiddo.

At the start of 2017, allocated costs were estimated as follows:

Employee benefits $1,500,000

Rent 1,500,000

Telecommunications 500,000

General and administrative costs 1,000,000

Total $4,500,000

In the past, allocations have been based on headcount (the number of employees in each

business unit). There were 240 employees in Stock and 80 employees in Custom. The new controller

of Kiddo 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. Kiddo rents 20,000 square feet; approximately 10,000 is occupied by Stock

employees and 10,000 by Custom personnel.

Required

PLEASE ANSWER (SHOW WORK) THANK YOU !

a. Prepare profit reports for Stock and Custom, 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 two decimal places.

b. Which provides the best information on profitability: a single overhead cost pool with headcount

as the allocation base, or multiple cost pools using headcount, sales, and space occupied