Travel Ready has three divisions: United States, Europe, and Caribbean. Corporate headquarters is in Boston. Travel Ready corporate headquarters incurs costs of $34,000,000 annually, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The president has asked each division manager to suggest an allocation base for the corporate headquarters costs from among revenues, division margin, direct costs, and number of employees. The following is relevant information about each division:

United States Europe Caribbean Revenues $40,000,000 $34,000,000 $26,000,000 Direct costs 25,000,000 21,000,000 14,000,000 Division margin $15,000,000 $13,000,000 $12,000,000 Division margin percentage 37.5% 38.2% 46.2% Number of employees 15,000 20,000 10,000

1. Allocate the corporate headquarters costs of Travel Ready to each of the three divisions using revenues, direct costs, division margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs.

2. Which method of allocation would you expect each manager to recommend? Explain.

3. What factors would you consider in deciding which allocation base Travel Ready should use?

4. Suppose Travel Ready decides to use number of employees as the allocation base. Should the European division be closed? Why or why not?

Suppose Travel Ready decides to use number of employees as the allocation base. Should the European division be closed? Why or why not?