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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

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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