Question
WASHINGTON CORPORATION is a decentralized operation with 4 operating divisions: Chairs, Microwaves, Shoes & Widgets. As controller of NAPOLEON, you are preparing a divisional performance
WASHINGTON CORPORATION
is a decentralized operation with 4 operating divisions: Chairs, Microwaves, Shoes & Widgets.
As controller of NAPOLEON, you are preparing a divisional performance presentation to senior management. Summary figures for the four divisions for the most recent years are as follows (in millions):
Chairs | Microwaves | Shoes | Widgets | Total | |
Revenues | $ 8,000 | $ 16,000 | $ 4,800 | $ 3,200 | $ 32,000 |
Operating costs | 3,000 | 15,000 | 3,800 | 3,500 | $ 25,300 |
Operating Income | $ 5,000 | $ 1,000 | $ 1,000 | $ (300) | $ 6,700 |
Identifiable assets | $ 14,000 | $ 6,000 | $ 3,000 | $ 2,000 | $ 25,000 |
Number of employees | 9,000 | 12,000 | 6,000 | 3,000 | 30,000 |
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The company currently allocates is common corporate costs to each division using a single cost pool based on revenues. For the most recent year, these costs totaled $3,200 (in millions). The divisional managers all share in a bonus pool based on division income. For this purpose, division income is calculated as operating income minus allocated corporate costs.
There has been some negative feedback and grumblings about the current allocation system, and so you have suggested a revised system which would break these corporate costs into 4 separate pools, with allocation bases as shown below:
Corporate Cost Category | Amount | Cost Pool | Allocation Base | ||||
Interest - debt | $ 2,000 | Cost pool 1 | Identifiable assets | ||||
Corporate salaries | 150 | Cost pool 2 | Division revenues | ||||
Accounting and control | 110 | Cost pool 2 | Division revenues | ||||
General marketing | 200 | Cost pool 2 | Division revenues | ||||
Legal | 140 | Cost pool 2 | Division revenues | ||||
Research & development | 200 | Cost pool 2 | Division revenues | ||||
Public affairs | 200 | Cost pool 3 | Positive operating income | ||||
Personnel and payroll | 200 | Cost pool 4 | Number of employees | ||||
Total | $ 3,200 | ||||||
REQUIRED:
1. Calculate the division income for each business unit based on the existing allocation method.
2. Calculate the division income for each business unit using the new activity-based system suggested.
3. Which division manager do you think had the biggest problem with the existing allocation scheme? WHY?
4. How do you think the new proposed system will be received by the division managers?
5. What are the strengths and weaknesses of this new system versus the existing single-pool method? What can be done to the new system to make it even better?
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