ABC Corporation has three divisions: pulp, paper, and fibers. ABC’s new controll
ID: 2447208 • Letter: A
Question
ABC Corporation has three divisions: pulp, paper, and fibers. ABC’s new controller, Ari Bardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2012:
A
B
C
D
1
Pulp
Paper
Fibers
2
Revenues
$ 8,500,000
$17,500,000
$ 24,000,000
3
Direct manufacturing costs
4,100,000
8,600,000
11,300,000
4
Division administrative costs
2,000,000
1,800,000
3,200,000
5
Division margin
$ 2,400,000
$ 7,100,000
$ 9,500,000
6
7
Number of employees
350
250
400
8
Floor space (square feet)
35,000
24,000
66,000
Until now, ABC Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Bardem asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:
F
G
H
1
Fixed Corporate Overhead Costs
Suggested Allocation Bases
2
Human resource management
$ 1,800,000
Number of employees
3
Facility
2,700,000
Floor space (square feet)
4
Corporate Administration
4,500,000
Division administrative costs
5
Total
$ 9,000,000
1. Allocate 2012 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2012 fixed costs using the allocation bases suggested by Bardem. What is each division’s operating margin percentage under the new allocation scheme?
3. Compare and discuss the result sof requirements 1 and 2. If division performance is linked to operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?
4. Which allocation scheme should ABC Corporation use? Why? How might Bardem overcome any objections that may arise from the divisions?
A
B
C
D
1
Pulp
Paper
Fibers
2
Revenues
$ 8,500,000
$17,500,000
$ 24,000,000
3
Direct manufacturing costs
4,100,000
8,600,000
11,300,000
4
Division administrative costs
2,000,000
1,800,000
3,200,000
5
Division margin
$ 2,400,000
$ 7,100,000
$ 9,500,000
6
7
Number of employees
350
250
400
8
Floor space (square feet)
35,000
24,000
66,000
Explanation / Answer
ABC Corporation has three divisions: pulp, paper, and fibers. ABC’s new controll